Increase shows that banks are still making moves in face of economic challenges
By Jeremy M. Simon
A boost in rates by a major card issuer lifted the national average APR on new credit card offers to 12.28 percent, according to the CreditCards.com Weekly Credit Card Rate Report.
That decision suggests banks continue to adjust to both ongoing economic challenges and new federal legislation aimed at curbing credit card abuses.
| CreditCards.com's weekly rate average chart | |||
|---|---|---|---|
| Avg. APR | Last week | 6 months ago | |
| National average | 12.28% | 12.14% | 12.84% |
| Balance transfer | 10.32% | 10.14% | 11.18% |
| Business | 10.49% | 11.07% | 16.74% |
| Low interest | 11.52% | 10.62% | 12.38% |
| Cash back | 11.69% | 11.77% | 13.76% |
| Rewards | 12.16% | 12.16% | 12.22% |
| Instant approval | 13.32% | 12.99% | 11.29% |
| Airline | 13.79% | 13.48% | 12.96% |
| Bad credit | 14.29% | 14.29% | 12.77% |
| Student | 14.45% | 14.45% | 15.79% |
| 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.) | |||
| Source: CreditCards.com | |||
| Updated: 9-10-2009 | |||
"We've definitely seen that slight upward tick" in APRs overall, says Andrew Davidson, senior vice president with Comperemedia in New York. "It's particularly interesting because prime is at such a low rate."
With the Fed content to leave its key lending rate unchanged for the time being, the prime rate remains at 3.25 percent. The central bank's federal funds rate is used to set banks' prime rates, to which the APRs for variable rate credit cards are generally tied.
The Fed has had a hands-off policy on changing rates since December 2008 in an effort to stimulate the economy. Once the economy recovers, the Fed will again begin raising rates, and when it does, it will impact the bulk of credit cards. "Almost all offers are variable-rate these days. The fixed-rate [cards] tend to be subprime," Davidson says.
For the time being, the Fed is expected to leave rates alone. Although there are signs of improvement, economic data continue to suggest challenges lie ahead. That includes a decline in the use of plastic. On Wednesday, the Federal Reserve's "beige book" survey of its regional banks showed consumer spending generally remained soft and lending standards remained tight during July and August.
In July, that combination helped to drive credit card balances down for the 10th straight month, as indicated by the Fed's G.19 report on consumer credit. That report, released Sept. 8, showed revolving credit -- a loan category comprised almost entirely of credit card debt -- declined at an annualized rate of 8.0 percent in July, following a drop of 6.4 percent in June. Overall, revolving debt fell to $905.6 billion from a total of $911.7 billion in June.
APRs advance amid premium card focus
But even with the fed funds rate staying put, APRs are moving higher. Analysts say the increase stems from lenders' reaction to the economy as well as the recently introduced Credit CARD Act, which enacted sweeping credit card industry reforms. "As we've seen the CARD Act come into place, card issuers have been more cautious" in terms of pricing, Davidson says. That means higher APRs for cardholders. This week, it was an increase on a Chase credit card that lifted rates.
Specifically, banks are offering a greater number of premium cards and launching new products in that premium marketplace segment. "Premium cards do tend to have a higher go-to APR," says Davidson. Mintel Comperemedia data released Wednesday shows that in the second quarter, credit card issuers sent 28 percent more direct-mail marketing offers for premium cards than they did in the first three months of 2009, even as issuers reduced overall credit card offers by 8 percent.
Those offers are aimed at that segment of consumers with the highest credit scores and, therefore, the lowest risk of being unable to make payments. "These cards have high associated fees and low risk. Issuers see them as an excellent way to restore profitability in today's economy," Davidson says.
As consumers rely less on credit and focus on saving money, banks will have a tougher time convincing consumers to use their plastic. Against this increasingly competitive backdrop, issuers will push premium cards -- with all their unique perks -- in an effort to become "top of wallet" for consumers, or their first choice for charging. "We will see this 'shrinking national wallet,' and tapping into the premium market is the safe place to start doing that at the moment," he says.
In the longer term, an increase in premium offers could signal an eventual increase in credit offers for all segments of the borrowing public. "If we're starting to see growth in premium cards, the extrapolation is that may trickle down," Davidson says.
