This year looks like more of the same for credit card interest rates, staying steady with any movement likely on the upside.
All eyes are on the economy and how that could affect issuers' borrowing costs. For individuals, staying on top of your financial commitments will help you get the best interest rate available.
"Those consumers who consistently make their payments on time will see better rates," says Keith Leggett, a senior economist at the American Bankers Association, "while those individuals who miss payments are going to see higher interest rates."
The average fixed interest rate for purchases in 2011 was 13.47 percent, according to a tally of Bankrate's 2011 weekly surveys of interest rates. That's down from 13.51 percent in 2010. The average variable annual percentage rate, or APR, rose 40 basis points to 14.44 percent from 14.04 percent the previous year. One basis point equals one-hundredth of 1 percentage point.
Credit card rates
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A key factor that determines interest rates, especially for variable-rate cards, is the prime rate, which is usually priced off the target federal funds rate, says Leggett. The federal funds rate has remained between zero percent and 0.25 percent for the last three years to help fuel the economy by making borrowing less costly.
"Frankly, because there is not an expectation that the economy is going to grow at any significant rate next year, rates overall are not going to increase. Maybe a slight uptick," says Bill McCracken, CEO at Synergistics Research Corp., an Atlanta-based marketing research firm for the financial services industry.
Still, issuers are girding themselves against any rise in rates by swapping out fixed-rate cards in favor of variable-rate cards, says McCracken. That way, any increase in interest rates can be passed on to the cardholder.
In late September 2011, one issuer in Bankrate's weekly survey of credit card interest rates deleted three of its fixed-rate offers and added three variable-rate cards. That caused the average APR on fixed-rate cards to jump nearly 0.5 percent that week.
"If you weren't on a variable rate, it's soon coming to you," says McCracken.
But consumers aren't completely beholden to factors out of their control when it comes to interest rates. Those with great credit who consistently pay their bills on time and keep balances low will likely get the low end of interest rate ranges.
Consumers with lower credit scores "will always, repeat always, pay more for credit products, often to the mid-20s," says Robert Hammer, chairman and CEO of R.K. Hammer, a bank card advisory firm in Thousand Oaks, Calif.
The good news for consumers with spottier credit is that their choices are broadening. An Equifax report released in November 2011 found that issuers gave out 56 percent more cards to subprime borrowers from January to August in 2011, compared with the same period the previous year. In general, banks handed out a quarter more credit cards to all consumers during the same period in 2011.
The best advice is to shop around because credit card APRs can vary by issuer, says Doug Miller, senior analyst for banking and credit cards at financial market research firm Corporate Insight.
And if you're in the market for an airline card, be prepared for a high APR, Miller says.
"In general, the only cards that tend to have higher interest rates are airline cards," he says, "because they continue to be in demand, and issuers can charge over the in-house traditional rate."