Interest rates edge lower just ahead of CARD Act implementation
Credit card interest rates dipped slightly this week following recent gains, and experts say they're likely to hold steady once new legislation takes effect on Monday.
|CreditCards.com's Weekly Rate Report|
|Avg. APR||Last week||6 months ago|
|Methodology: The national average credit card APR is comprised of 95 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.)|
Annual percentage rates (APRs) on new credit card offers edged lower this week to 14.14 percent, according to the CreditCards.com Weekly Credit Card Rate Report. That pullback left rates barely changed from last week's average, which was the highest since tracking began in 2007. Credit card APRs have risen steadily in the months leading up to the enactment of the Credit CARD Act's major provisions on Feb. 22, when new law will begin limiting the circumstances under which banks can raise rates.
"Credit card companies are raising rates now before the Credit CARD Act makes it harder to do so, much the same way that households rushed to file for bankruptcy in late-2005 before new laws made it more onerous to do so," says Sean Maher, an associate economist with Moody's Economy.com.
Banks' recent rate increases are making cardholder wallets somewhat lighter. For example, someone who borrowed $5,000 on a credit card today and consistently paid $150 per month at today's average interest rate would have to pay $6,388 to pay off the debt. That's $268 more than would have been required six months earlier.
Still, experts say that cardholders with the strongest credit histories -- so-called prime borrowers --could enjoy lower costs as banks compete for their affection. "Credit card issuers targeted the unbanked or subprime customer during the late '90s and early 2000s. Now everyone is going after the prime and super-prime" cardholders, says Keith Davis, research analyst with Farr, Miller and Washington in Washington, D.C.
Banks find those borrowers extra appealing amid a shaky economy, since prime cardholders are more likely to pay their bills. At a time when revolving debt levels overall are falling, experts say lenders are simultaneously aiming to reduce their loss rates by avoiding subprime cardholders with poor credit histories.
Meanwhile, as banks compete for the prime segment with improved offers, the news laws mean borrowers as a whole could experience lower APRs. "Once the CARD legislation takes effect, credit card issuers will not be able to raise rates on new accounts for the first year, or raise rates on outstanding balances, and they will have to give 45 days' notice before raising rates," Maher says. (Consumers with their own questions about the CARD Act's specifics can direct them to the White House prior to or during a live online town hall hosted by CreditCards.com on Feb. 22.)
Experts agree that against that backdrop, and with a renewed sense of competition, lenders will likely keep interest rates relatively steady. "Going forward, I think its going to be a lot harder for banks to keep raising their rates," Davis says.
See related: A guide to the Credit CARD Act of 2009, Bankruptcy filings return to pre-reform-law pace, Fed report: Consumer credit card balances keep plummeting, White House to answer consumer questions about Credit CARD Act
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