Feb. 10, 2016: Average rates on new card offers dipped Wednesday after rising the previous week to a four-year high, according to the CreditCards.com Weekly Credit Card Rate Report
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The national average annual percentage rate fell to 15.16 percent after subprime lender Credit One cut its minimum card interest rates so low they rivaled rates offered to consumers with above-average credit scores.
Consumers who apply for a Credit One Visa Platinum card are now offered a range of APRs starting at 15.65 percent and topping out at 24.15 percent. Previously, the lowest available rate cardholders with imperfect credit could get was 18.15 percent. Credit One also slashed the Platinum card’s minimum annual fee range from $35 to starting at $0 while leaving the card’s $100 maximum fee alone.
The rate cut on the Credit One card caused the average APR for subprime cards to fall to 22.56 percent.
Card borrowing poised to grow as credit limits increase
Card issuers are becoming more liberal with credit card spending limits, according to multiple reports, and that’s setting borrowers up for significantly more debt.
According to a report from the Federal Reserve Bank of Boston, many credit card holders tend to increase their borrowing substantially when awarded fatter credit limits. The larger a credit limit grows, the more consumers charge — even if consumers are only using a fraction of their total available credit limit.
For example, if a cardholder’s credit limit increases by 10 percent, the typical credit card revolver — a card user who rolls over debt from month-to-month — will increase his or her borrowing by nearly the same amount, researchers found. “The pass-through of credit into debt for revolvers is nearly complete,” wrote study authors Scott L. Fulford and Scott Schuh in the report. “Following a 10 percent increase in credit limits, the debt of revolvers eventually increases by 9.99 percent.”
Even in the short-term, cardholders’ debt increases by a significant amount. The researchers found that revolvers will typically charge 1.3 percent more in the first three months after a credit limit increases by roughly 10 percent. “For those revolving debt, long-term credit and debt are closely related,” wrote Fulford and Schuh.
Consumers with lower credit scores are especially likely to increase their borrowing following a credit limit increase, according to the study. “For consumers with the lowest scores, a dollar increase in limits is followed by 59 cents more debt within a year.”
In addition, the study found, credit card holders tend to use up roughly the same amount of their credit limit throughout most of their adult lives — even when a soft economy causes card issuers to sharply trim credit limits. For example, credit card holders in their 20s typically use up roughly 50 percent of their credit limits, on average, while credit card holders in their 40s typically use up about 40 percent of their credit limits. “Credit utilization falls below 20 percent only after age 70,” wrote Fulford and Schuh.
This holds true even after cardholders’ finances have changed significantly. After a financial shock, for example, cardholders might change their credit habits briefly, but they eventually go back to using up roughly the same amount of available credit as before.
Shocks to the economy don’t appear to affect cardholders’ credit utilization habits much, either. Overall, credit utilization held steady from 2000 to 2014 at around 30 percent.
The authors analyzed data pulled from the New York Federal Reserve’s Consumer Credit Panel. The study’s findings suggest that the large swings in total credit card debt that have occurred since the Great Recession may have had more to do with card issuers’ credit limit policies than with individual cardholders’ appetite for borrowing.
|CreditCards.com’s Weekly Rate Report|
|Avg. APR||Last week||6 months ago|
|Methodology: The national average credit card APR is comprised of 100 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed above. (Introductory, or teaser, rates are not included in the calculation.)|
|Updated: Feb. 10, 2016|