Friday, October 30, 2009

Credit card interest rates push higher again

By Jeremy M. Simon

If you've experienced a sudden increase in your credit card's annual percentage rate, new data confirms that you aren't alone.'s weekly rate chart
Avg. APR Last week 6 months ago
National average 12.64% 12.61% 12.59%
Business 9.69% 9.69% 16.74%
Low interest 11.91% 11.91% 12.55%
Cash back 12.36% 12.36% 11.91%
Reward 12.85% 12.76% 12.37%
Instant approval 13.32% 13.32% 11.49%
Balance transfer
13.46% 13.46% 11.27%
Airline 13.60% 13.60% 14.44%
Bad credit 14.29% 14.29% 12.15%
Student 14.45% 14.45% 14.90%
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: 10-29-2009

This week, APRs on new credit card offers inched up to 12.64 percent, according to the Weekly Credit Card Rate Report. The latest increase continues a trend of rising interest rates this year, as new reports show banks continue to use rate hikes and other term changes to increase revenues ahead of a new card law.

A report released Wednesday by the nonprofit Pew Charitable Trusts found that none of the cards offered online by the leading U.S. banks would meet the requirements of the Credit CARD Act set to take effect in February. "One hundred percent of credit cards from the largest 12 banks used practices deemed 'unfair or deceptive' under Federal Reserve guidelines," Pew says.Those soon-to-be-banned practices include: hiking rates at any time on existing cardholders, triggering penalty pricing with just one or two late payments per year and applying payments to lower interest balances before higher interest ones.

That doesn't surprise credit counselors, who have been hearing firsthand reports from cardholders. "People who have fairly good credit scores are seeing a rate increase, and it doesn't seem to be related to their credit situations," says Sandy Shore, senior counselor with debt management firm Novadebt in Freehold, N.J.

The latest findings from Pew show just how steep and widespread those APR increases have been. According to the Pew report, advertised APRs rose an average 20 percent during the first half of 2009. It also reported that 99.7 percent of cards allowed issuers to raise APRs on existing cardholders at any time, up from 93 percent in December.

Even as the February deadline for compliance with the CARD Act approaches, banks haven't stopped hiking APRs. Data released Thursday by Comperemedia -- which tracks credit card direct mailings -- shows that the mean purchase APR on variable rate card offers has reached 12.53 percent in the third quarter. That's up from 12.06 percent in the second quarter and 11.8 percent at the end of last year.

According to data, the national average APR has advanced to 12.64 percent from 12.59 percent six months earlier.

"We're seeing [APRs] edge up, particularly for cards that don't have a fee," says Andrew Davidson, senior vice president with Comperemedia in New York. Davidson explains that banks are experimenting with higher rates on some cards and new fees on others. "The CARD Act will be eating into revenues and so issuers are looking at any legitimate means possible" to offset the loss of revenue, he says.

He notes that credit cards that don't charge an annual fee are seeing their APRs increase, while cards with a fee have seen rates come down. "Just saying card rates are going up isn't the full picture," Davidson says.

Those cards that charge a fee -- typically rewards cards -- tend to charge higher APRs to start with. They now account for a larger portion of new card mailings: Davidson says that offers for fee-based reward cards totaled 26 percent of mailings, an increase from both 21 percent in the second quarter and 13 percent one year ago. That has helped boost the average APR for offers overall. "Issuers have become more cautious and they're putting out more premium offers. That's a reflection of this trend," he says.

Banks have good reason to be cautious. As layoffs continue, many consumers are finding it increasingly difficult to make credit card payments. The latest data from Fitch Ratings shows that card payments more than 60 days late rose to 4.22 percent in September.

Shore says that examining the credit reports of prime borrowers suggests that the economy is taking its toll -- including evidence of cardholders with rising levels of debt compared to their available credit -- even if the cardholder's credit score doesn't yet reflect that reality. "Somebody can have a high credit score, but there are signs of stress," she says.

Shore says that as banks introduce annual fees, cardholders could respond by closing those accounts rather than making an annual payment. "People who have very good credit are going to reduce the number of credit cards they have," she says. With fewer open accounts, if they decide to make a large purchase on plastic, those borrowers could unwittingly bump up their utilization ratios -- and damage their credit scores.

Her warning to those cardholders is one all borrowers should obey in this economy: "Now you have to be really careful."

Uncle Sam wants you ... unless your credit stinks

Finances unfit? Your country may not let you wear its uniform

By Melody Warnick

You may be ready to serve your country, but if your finances aren't in good shape, your country may not allow you to serve.

Like a lot of civilian employers, some branches of the military in the United States now run a credit check on anyone who wants to enlist -- and a credit history full of late payments, bankruptcies, accounts in collection, foreclosures or sky-high debt can keep you from joining up. Uncle Sam wants you... unless your credit stinks

Each branch of the military sets its own policies about whether to check out the credit history of potential recruits, so not everyone puts a long-overdue gym payment on par with the inability to pass a physical. However, when you're signing up with the Air Force or the Coast Guard, a credit check is a standard part of your background check.

Even if you pay on time, a heavy debt load may put a blip on the military's radar. The Air Force rules out applicants with a debt-to-income ratio of more than 40 percent, which means that your debt (for credit card bills, car loans, student loans, medical bills and the like) can't rise above 40 percent of your monthly gross income. They don't look kindly on bankruptcies, foreclosures or late payments, either.

In the Air Force, "we trust individuals to be able to work on their own with very little supervision. If you're having problems taking care of your own personal responsibilities, how can we trust you with the responsibilities of the Air Force?" says Angelo Haygood, deputy chief of Air Force recruiting operations.

In the Coast Guard, which has the strictest rules, your application will get tossed out for a debt-to-income ratio of 30 percent or more (meaning that your debt adds up to one-third of your monthly gross income) or for bad debt. Since implementing that standard in 2008, credit history black marks have rendered 25 percent of otherwise qualified Coast Guard applicants ineligible to serve. Even if you've aced your physical and passed the Armed Services Vocational Aptitude Battery -- the military admissions test -- a history of money mistakes means you'll still be sent packing.

The Army, Navy and Marine Corps, on the other hand, usually run credit checks only on applicants who need to qualify for a security clearance, who seem to be in financial trouble or who require a dependency waiver -- necessary for those with more than three dependents (a spouse and two children, for instance). But they forgo hard-and-fast rules in favor of a case-by-case approach.

Financial readiness and mission readiness
Mountains of credit card debt and past-due bills may not reflect on your patriotism, but they can paint a not-so-pretty picture of your future service, say military experts. Haygood says the Air Force sees potential recruits money mistakes as a sign that they're irresponsible or just plain untrustworthy. For starters, money woes can make you more likely to engage in a financial crime -- such as espionage -- to pay off debts. "You don't want someone dealing with secret information who is in bad debt to the point where they could compromise information to get money to pay the debt off," says Douglas Smith, a public affairs officer with U.S. Army Recruiting Command.

Credit issues can also lead to job performance issues when members of the military need to hold down a second job to pay off bills. Even the distraction of dealing with creditors and sweating over rising debt can make servicemembers less-than-stellar employees. "Credit card debt can be a very heavy burden," says Chief Warrant Officer Scott Carr, a spokesman for Coast Guard Recruiting Command. "If a person is getting called by creditors, it's constantly on their mind. It's putting a lot of stress on them, then they start to become an ineffective member of the unit. You're starting to put your shipmates' lives in danger because you're not totally focused."

We trust individuals to be able to work on their own with very little supervision. If you're having problems taking care of your own personal responsibilities, how can we trust you with the responsibilities of the Air Force?

-- Angelo Haygood
Air Force recruiter

In the past, the Air Force checked candidates' credit only if they fell into certain categories: They were married, older than 23 or they admitted they'd had financial problems in the past. New 18-year-old recruits were seen as too young to have any credit history, let alone overwhelming debt, so credit checks weren't done until recruits got to basic training. Over time, however, so many young recruits had credit issues that it warranted a change in policy, says Haygood. "One guy who was 19 years old had over $9,000 of bad credit. We found that banks were lending to people younger and younger, whether they had a job or not." As of September 2008, the Air Force's new policy dictates that 100 percent of potential recruits are subject to a credit review.

Not everyone takes such a dim view of recruits with underwater credit. "There's not a minimum credit score to join the Navy," says Tom Jones, a public affairs officer with Navy Recruiting Command. "We're looking for people who say, 'Hey, I want to put the country before myself,' not, 'Hey, I have a 690, will you take me?'"

Be all that you can be
Not everyone with heavy-duty debt or bad credit is a military washout. The Army, Navy and Marine Corps are more likely to accept a candidate with past money issues. According to Lt. Col. Thomas J. Rouse, deputy commander of U.S. Army Central Clearance Facility, which processes financial eligibility determination for new recruits, the Army takes a more holistic look at applicants with credit report problems, weighing mitigating factors such as when the foul-up occurred, the severity of the issue and the maturity of the person at the time.

Recruiters are also more sympathetic if you can provide a good explanation for your financial woes -- for instance, overwhelming medical bills or a misunderstanding with a roommate about who was paying for that final month's rent.

Still, it's hard to predict what will and won't matter to a recruiter, so avoid surprises and find out exactly where you stand before you step foot in the recruiting office. "If you feel you have some credit issues, get one of the free credit reports and check your credit. Then go through it and fix any negative credit before you even go and talk to a recruiter," says Haygood.

There's not a minimum credit score to join the Navy. We're looking for people who say, 'Hey, I want to put the country before myself,' not, 'Hey, I have a 690, will you take me?'

-- Tom Jones
Navy recruiter

You may have to spend a few months paying off loans or making good on bad debts, but once you fix up your financial past, all branches of the military will be willing to give you a shot. Even if you were caught flat-footed in the recruiters' office, an effort to restore your credit and pay down loans earns you a second chance.

Once you're in
Once you've cleared the initial financial barricades and are in the military, you're not home free. In all branches of the military, security clearance is tied to your personal finances, so if you squeaked by enlistment with a so-so credit report, you may still find yourself ineligible for certain positions within the military. Even long-time military members are subject to periodic credit checks when their security clearances are being reviewed for, say, a promotion from "secret" access to "top secret." If you've fallen deeper in debt or racked up a fresh pile of past-due notices, you could be denied a promotion or have your current security clearance revoked.

The problem isn't uncommon. In 2008, 81 percent of security clearance denials for members of the Navy were due to money problems. And a 2006 Associated Press report found that the number of soldiers in the Navy, Marines and Air Force whose debt led to a loss of their security clearance skyrocketed from 284 in 2002 to 2,654 in 2005, a ninefold increase.

The U.S. military is trying to help its members get a grip on their finances with a variety of tools.

  • The Service Members' Civil Relief Act,, a decades-old law revised in 2003, aims to keep financially challenged military members from falling deeper into debt by capping interest rates on credit cards and mortgage loans at 6 percent for active duty military. A written note to a lender should give you a substantial break on interest payments while you're serving.
  • Each military base or installation has an on-site personal finance manager available to offer credit counseling and help set up a budget.
  • The military also partners with nonprofit credit management firms to offer free credit scores, reduced-rate debt consolidation and personalized action plans for improving credit to service men and women.

Bottom line: Times are tough for everyone, but to make a go of a career in the military, you'll have to be on your best financial behavior -- starting before you march off to see a recruiter.

Branch-by-branch guide to enlisting when you're in debt
Branch Who gets a credit check? What are potential red flags? What happens if you fail to meet the requirements?
Army Applicants who need security clearance Bad debt, accounts in collections, delinquencies, foreclosure or bankruptcy You don't get security clearance
Navy Applicants who need security clearance High levels of debt You don't get security clearance
Air Force All applicants Debt-to-income ratio of 40%; bad debt; late payments; bankruptcy; accounts in collections You can't enlist until your financial issues are resolved
Marines Applicants who need security clearance High levels of debt You don't get security clearance
Coast Guard All applicants Debt-to-income ratio of 30%; bad debt You can't enlist until your financial issues are resolved