credit cards

What moves credit card rates?

The Federal funds rate, from which the prime rate is derived, is the target rate set by the Federal Open Market Committee. Since December 2008, the rate has been at a range of 0 percent to 0.25 percent.

If the Fed funds rate isn't moving but interest rates on various products are, what's driving rate changes? Below, Bankrate shows you what is causing rate changes in mortgages, home equity loans, auto loans, CDs and money market accounts and credit cards.

Credit Cards

Since December, the Federal Open Market Committee hasn't raised the federal funds target rate from its historic low, between zero percent and 0.25 percent. The prime rate follows the federal funds rate and serves as the index for most variable-rate credit cards.

Yet the low prime rate hasn't driven interest rates down. Rather, legislative pressure and soaring loss rates have motivated many issuers to raise rates on some cardholders and hold variable rates for new accounts steady. As of June 18, the average variable rate for new customers was 10.88 percent. It has hovered near 11 percent since December.

"The data I see is basically showing that rates are increasing slowly but steadily," says Megan Bramlette, a managing associate for Auriemma Consulting Group, a New York-based firm that serves the financial services industry.

Then and now
ProductRate on
Dec. 18, 2008
Rate on
June 17, 2009
Variable rate credit card11.04%10.8%


"That's really in response to high loss rates from the banks."

In fact, the delinquency rate for bank-card debts 90 days or more past due climbed to 1.32 percent for the first quarter of 2009, an 11 percent year-over-year jump, according to TransUnion, a Chicago-based national credit reporting firm.

Charge offs, or card debts written off as uncollectible, rose to 7.49 percent, up from 6.33 percent in the fourth quarter of 2008, according to Federal Reserve data.

New law will impact rates

Another factor influencing rate movement is the recent passage of the Credit Card Accountability Responsibility and Disclosure Act, or Credit CARD Act, which, among other changes, will restrict issuers' ability to raise rates on existing balances. Many card issuers didn't wait for a final vote on legislation to jack up rates on existing cardholders.

"It was almost like a pre-emptive hike, because nobody really knew what the laws were going to be or what the consensus was going to be," says Adil Moussa, an analyst covering the payments industry at Aite Group in Boston. "I think what happened was that we saw a lot of banks just increase their standard rates by about 3 percent before anything ever happened."

On the bright side, he thinks the rate hikes are done for now, contending that further increases would drive away unhappy cardholders.

He predicts the negatives could come in the form of less attractive promotional offers and new fees. Introductory periods could shorten to six months at 2.9 percent or 3.9 percent instead of zero percent, and annual fees could resurface.

The Credit CARD Act doesn't take effect until 2010, so existing balances aren't yet protected from arbitrary rate hikes. For now, do what you can to stay under the radar. Pay on time, keep balances low and use cards you want to keep to avoid closure.

If you're dealing with other money problems, Bankrate can help. Read "How to solve 5 money problems."

Credit card interest rates since December 2008

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Product Rate Change Last week
Balance Transfer Cards 15.71%  0.02 15.69%
Cash Back Cards 16.41%  0.01 16.40%
Low Interest Cards 10.86% --0.00 10.86%
 
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