Monday, November 23, 2009

Credit card APRs fall sharply, but you shouldn't get too excited

By Jeremy M. Simon

The average interest rate on new credit card offers fell sharply this week, according to the Weekly Credit Card Rate Report, but don't expect your rate to drop, too.'s weekly rate chart
Avg. APR Last week 6 months ago
National average 12.68% 12.79% 12.38%
Business 9.49% 9.49% 16.74%
Low interest 11.65% 12.12% 11.95%
Balance transfer 12.07% 12.27% 10.99%
Cash back 12.08% 12.11% 12.06%
Reward 13.29% 13.29% 13.01%
Instant approval
13.32% 13.32% 10.74%
Airline 13.60% 13.60% 12.96%
Bad credit 13.74% 13.74% 12.15%
Student 14.89% 14.89% 14.52%
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.)
Updated: 11-19-2009

This week, the national average credit card rate fell to 12.68 percent due to a reshuffling of card offers in the database -- not because of any APR cuts by issuers. Banks previously present in the representative sample of about 95 national cards held their rates steady this week, taking a break from what has been a steady stream of increases throughout 2009.

This week's break likely won't last long, though, as banks struggle to protect their profits in the face of increased regulation, as well as cardholder delinquencies spurred by the economic downturn.

In general, credit card interest rates have been on an upward swing. Six months ago, the average rate was a half-point lower, at 12.38 percent. Someone who borrowed $5,000 on a credit card today, and consistently paid a typical minimum balance at today's rate would have to pay $9,498 to pay off the debt. That's $113 more than would have been required six months ago.

Consumers are still struggling
With cardholders already hesitant to go shopping, experts say those higher APRs are discouraging consumer spending and -- by extension -- economic growth, since consumer spending accounts for a significant portion of the overall U.S. economy.

"It is unfortunate that [rate hikes are] going on now while we're looking for the consumer to really kick in here," says George Mokrzan, senior economist with Huntington Bancorp in Columbus, Ohio.

One indication that consumers are reining in their spending: Overall consumer debt has fallen for a record eight straight months, according to recent Federal Reserve data. This aversion to debt seems unlikely to change anytime soon -- with the nation's unemployment level reaching 10.2 percent in October and some economists predicting that it will continue to rise into next year. The threat -- or reality -- of job loss makes cardholders less able to repay their card balances, increasing the delinquencies and charge-offs experienced by banks.

Issuers have, in response, increasingly turned to variable rate offers with interest rates that will increase when the Federal Reserve raises its key lending rate. Variable rates are set using the prime rate, which is 3 percentage points above the federal funds rate. Currently, the fed funds rate rests at a level near zero and the prime rate stands at 3.25 percent.

However, this week, Fed Chairman Ben Bernanke said a rate hike is unlikely in the near term. In his concluding remarks made during a speech Monday, Bernanke said that economic conditions will likely encourage the Fed to maintain "exceptionally low levels" of its fed funds rate "for an extended period."

Mokrzan says he doesn't expect the Fed to increase rates before the second half of 2010. "Until the recovery is on firmer ground, I don't think the Fed will think about raising rates," he says. For now, though, Mokrzan says that even as the recovery takes hold, nagging threats mean that lenders are being cautious.

Economists say that, eventually, it will take both banks and borrowers doing their part to aid the economic recovery. "The environment will change, and the perception of risk by the banks will improve, and the risk taking by consumers will improve," Mokrzan says.

"Everybody's involved in the process. Everybody's driving it and reacting to it," he added.'s weekly credit card rate survey is based on a sample of about 95 national credit cards; the sample is chosen to be representative of the most frequently used cards by both popularity and type. That sample is updated as cards come and go from the market, and as the popularity among different types of cards shift.