Credit card interest remains high while other rates stay low

Average at 15.14 percent nationally

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The interest rates consumers are paying on credits cards remain high, even as rates for other loans scrape along at all-time lows, according to a new report.

In its first survey of the new year, CreditCard.com found that national interest rates on new credit card offers averaged 15.14 percent. That’s higher than the average annual percentage rate (APR) of 14.71 percent in the first week of 2011. It’s an even greater increase from the first week of 2010, when rates averaged 12.87 percent.

In each of the past two years, there have been seven record highs set for credit card rates. The latest record was set in mid-December at 15.22 percent.

“Those records mean real money to consumers,” the web-based financial site reported, after surveying 100 credit cards from across the country. “For example, a cardholder who borrowed $5,000 on a credit card with an APR of 15.22 percent and consistently paid $150 per month would have to pay $6,541 to pay off the debt. That’s $74 more than would have been required at 14.71 percent - the average APR of the new card offer a year ago.”

The high rates are even more striking when compared with the interest being charged consumers on loans for cars, homes and other purchases.

Housing giant Freddie Mac said last week that the average rate on a 30-year fixed-rate mortgage was at a new record low of 3.91 percent, down from the previous 3.95 percent. That represented the fifth consecutive week the benchmark home-loan rate has been below 4 percent. At the same time last year, the rate was 4.77 percent.

The 15-year fixed-rate mortgage average is 3.23 percent, down from last week’s 3.24 percent and last year’s 4.13 percent, according to Freddie Mac.

Auto loans are also on the way down, according to a separate survey by Bankrate.com. The rate for a new 48-month car loan is 5.27 percent, the lowest ever recorded. That’s down from a record high of 12.83 percent in November of 1985.

So why are credit card costs staying so high, when other rates are so low?

Greg McBride, senior financial analyst at Bankrate.com, and many in the lending industry blame the credit card reform law passed by Congress in 2009. Among other provisions, the law prevents issuers from raising the rate on an existing balance until the cardholder has missed payments for more than 60 days.

To cover their increased risk on defaults, Mr. McBride said, issuers began raising the rate up front on all credit cards, for both delinquent cardholders and those who have made every payment on time.

“The overriding factor in that increase in rates is [the law],” he said. “That’s like telling an auto insurance company that they can only raise the premiums after the car gets totaled. If somebody’s getting speeding tickets and DUIs, there’s a lot of risk there.”

He pointed out that average credit card rates nationally gradually have increased since the bill. In April 2009, it was 10.73 percent, according to Bankrate.com’s survey. In September 2009, it was up to 11.41 percent. In April 2010, it jumped to 13 percent. In January 2011, it rose to 13.68 percent. And this month, it is sitting at 13.94 percent.

“If they can’t reprice for risk on the fly,” Mr. McBride said. “They’re going to price for it on the front end. So it’s no mystery credit card rates started to move up.”

Greg Daco, senior U.S. economist at IHS Global Insight, agreed that the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act has limited the fees lending institutions can charge.

“The profit margins have been squeezed,” he said, “so the banks don’t have much of an incentive to lower credit card rates.”

Mr. Daco also explained that credit card rates depend on a different measure than many other consumer loan rates. Credit card rates are based on the prime rate, which has remained stable at 3.25 percent, while mortgage and car loan rates are based on the cost of funds rate, which is linked to Treasury bond rates, a number that has been declining.

In the meantime, the Consumer Financial Protection Bureau in December began trying to simplify credit card agreements, which would help consumers understand what rates they will be paying.

“Most rates are at record lows,” Mr. McBride said.

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