Interest Rates Are Lower… Yet Credit Card APRs Remain Unchanged

Credit Card Interest Rates UnchangedSince the credit crisis of 2008, the federal funds rate has dropped and default rates are falling, yet credit card interest rates have remained steady at around 13 percent. So why aren’t people who carry a balance on their credit card getting a break? Banks are paying less for the money they borrow and less people are defaulting on their credit card accounts, shouldn’t they be passing along the savings to consumers? One expert blames this conundrum on “inertia”, a nice way of saying that consumers aren’t shopping around for better deals.

Market interest rates, as measured by the benchmark federal funds rate, have declined about 3 percentage points since 2008, yet credit card rates remain unchanged. According to David Ely, an economist and finance professor at San Diego State University:

“Banks, facing lower returns on their investments and lower profits on home mortgages, are probably relying on their credit card operations for profits, so they’re happy to keep rates at higher levels, as long as no one complains about it too much.”

Why Credit Card Rates Remain High

People with good credit have become much less dependent on their credit cards since the financial meltdown in 2008, and those who have less than perfect credit may quietly stick with the credit card they have because they think it will be impossible to get a different one. If no one is shopping around or looking to open new accounts, banks have no reason to lower their rates.

Another factor that is likely impacting the number is the prevalence of reward credit cards. Reward cards, which tend to have higher interest rates than traditional, no-perk cards, are increasingly popularity and many consumers overlook the fact that they cost more. Some people optimistically think they won’t carry a balance, but eventually find themselves drowning in credit card debt.

A final factor that may be playing a role is the Credit CARD Act of 2009. Designed to protect consumers from “unfair” lending practices, it places tough restrictions on when and how a bank can raise interest rates, making them even more hesitant to lower APRs.

Why You Should Take Action

The difference between 13% and 10% may not seem like a big deal, but just a few percentage points in your interest rate can make a huge difference in the amount you pay over time. The average consumer carries over $10,000 in credit card debt, with a 3% jump equating to $300 in interest charges per year. That number is even larger when you carry higher balances, and the problem gets amplified when you pay only the minimum monthly payment.

Several years ago it was extremely difficult to find a competitive credit card rate, let along get approved, but the atmosphere is changing. According to TransUnion, new offers are up, as banks loosen their grip on lending. If you have good credit, it’s relatively easy to find a rate under 10%, and your chance of getting approved is much better. Even if your credit is damaged or less than perfect, there are multiple lenders willing to give you a chance, but it comes with extra fees and interest.

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