Interest rates surge higher as credit card reform arrives

Banks jacked interest rates to record levels this week, getting in their final licks against consumers just ahead of the new credit card regulations. 

The national average interest rate on new credit card offers hit 14.62 percent, according to the Weekly Credit Card Rate Report. That rate was the highest since tracking began in 2007, as banks squeezed in one last batch of rate increases before the credit card reform law went into effect Feb. 22 and limited their ability to do so in the future.

Among its consumer-friendly changes, the law restricts lenders' ability to to raise rates on existing card balances. During the lead-up to the major provisions of the Credit CARD Act, which took effect on Monday, card issuers systematically boosted the annual percentage rates (APRs) on their card offers. Now that the rules are in place, however, the period of rising APRs may be over, experts say.'s Weekly Rate Report
  Avg. APR Last week 6 months ago
National average 14.62%
Business 11.32%
11.32% 11.07%
Low interest 12.23%
Cash back  12.61%
Balance transfer
Airline 14.37%
Student 14.61%
Instant approval 18.41%
Bad credit 25.99%
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.) See historic credit card rates.
Updated: 2-24-2010

Lenders have acknowledged that the stricter regulations influenced their policy changes. Citi, one of the many issuers that recently hiked APRs, said that its latest pricing adjustments stemmed from higher losses due to delinquent cardholders as well as the limitations introduced by the CARD Act. "We understand that customers don't like price increases, especially in difficult economic times. However, these actions were necessary given the doubling of credit card losses across the industry from customers not paying back their loans and regulatory changes that eliminate repricing for that risk," says Citi spokesman Samuel Wang.

Such repricing by banks means cardholders pay more to revolve their debt from month to month. 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 $6,455 to pay off the debt. That's $321 more than would have been required six months earlier. (Calculator: How long will it take to pay off your credit card balance?)

Doing more than just raising rates
Banks have gone beyond just raising rates to restore their profits. They've also shifted more of their card products to variable rates from fixed rates. Many of the largest issuers, including Bank of America and Chase, switched their customers over to variable rate cards in 2009. Most variable rate credit cards have APRs that track the prime rate, which is itself set using the Federal Reserve's key lending rate. That means when the Fed eventually raises its fed funds rate, which it last did in December 2008, it will likely cost more for the majority of U.S. cardholders to carry a balance.  

For the time being, however, the Fed looks prepared to hold lending rates at record lows. In his semiannual monetary policy testimony to Congress on Wednesday, Fed Chairman Ben Bernanke said that economic conditions will likely require "exceptionally low levels of the federal funds rate for an extended period" -- language which is generally understood to mean any rate hikes won't happen for at least several months. That should give variable rate cardholders a temporary reprieve from any Fed-generated APR increases.       

Amid that Fed pause and the new restrictions on banks, it looks like cardholders may get to enjoy a temporary vacation from rising interest rates.

See related: Credit card reform arrives in the form of the Credit CARD Act, A guide to the Credit CARD Act of 2009, Variable interest rate cards replacing fixed rates, Calculator: How long will it take to pay off your credit card balance?, Interactive: Historic credit card rates

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Updated: 03-22-2019