Credit card interest rate forecast for 2021: APRs seen holding steady

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Credit card interest rates seesawed only slightly in 2020, and they should remain stable in 2021.

The average rate on credit card accounts that charged interest sat at 16.61 percent in the first quarter of 2020, then dipped to 15.78 percent in the second quarter and edged up to 16.43 percent in the third quarter, according to Federal Reserve data. Bankrate.com data shows the average interest rate for variable-rate credit cards hovered around 16 percent from September to December.

So, where will credit card rates head in 2021 as the U.S. continues digging out of the financial hole caused by the coronavirus pandemic?

Chances are, rates in 2021 should stay close to the nearly four-year low they enjoyed in 2020. That’s because the Federal Reserve, which oversees U.S. monetary policy, is keeping its benchmark interest rate near zero to stimulate economic growth. This rate—called the Fed funds rate—influences interest rates set by lenders, including credit card issuers. When the Fed cuts the benchmark interest rate, credit card interest rates tend to be lower.

“Existing cardholders won’t have to worry about their interest rates changing as the Fed intends to hold benchmark interest rates at current levels through 2021 and beyond,” said Greg McBride, CFA and chief financial analyst at Bankrate.

But McBride said increasing delinquencies and defaults would lead to a “bifurcation” in outcomes for prospective cardholders, depending on their credit standing.

“Issuers will increase the rates being offered to consumers with weaker credit and more debt to compensate for risk, while at the same time getting more competitive with lower rates and enhanced rewards for consumers with strong credit and deemed to be at lower risk of default,” he said.

McBride predicts the average credit card interest rate will rise to 16.15 percent in 2021, despite an otherwise static interest rate environment.

Learn more: Best credit cards of 2021

Wary card issuers could raise APRs

Krista Tedder, director of payments at financial services advisory firm Javelin Strategy & Research, also believes credit card interest rates will remain stable in 2021.

But card issuers, wary of financial risks, may bump up their interest rates if more customers fall behind on monthly payments. Survey data released in December by the U.S. Census Bureau found about one-fourth of American adults had run into difficulty paying household expenses during the previous seven days.

Furthermore, individual consumers risk being penalized with higher credit card interest rates if they fail to make on-time payments, Tedder said.

“With the current economic impacts to small business, the unemployment rate and consumers working paycheck to paycheck, interest rates can dramatically increase when payments are missed,” she said.

However, that may not be a major issue in 2021 if consumer behavior in 2020 is any indication.

Experian, one of the three major credit bureaus, reported in November that from 2019 to 2020, the percentage of delinquent credit card accounts had fallen 24 percent for accounts 90 to 180 days past due, 31 percent for accounts 60 to 89 days past due and 33 percent for accounts 30 to 59 days past due. During the same period, the average credit card balance decreased by an average of 14 percent and overall credit card debt declined by 9 percent.

A resurgence in low interest and 0 percent APR offers?

David Shipper, senior research analyst in the retail banking and payments practice at research and consulting firm Aite Group, said he expects credit card issuers to crank up their marketing in 2021 after a significant pause following the March 2020 declaration of the coronavirus pandemic. This, in turn, should lead to a slew of competitive introductory offers of low interest or even 0 percent interest, he said.

“With that said, economic conditions will play a factor, and low-rate offers may be reserved for cardholders with the highest creditworthiness,” Shipper said.

There may be a healthy appetite for those credit card offers in 2021. Lenders, including credit card issuers, tightened their lending standards due to the pandemic and accompanying recession. A poll commissioned in October by Bankrate.com found 13 percent of American adults had been rejected for a new credit card in 2020.

But if pandemic-era spending and saving trends stretch into 2021, consumers might not be too eager to take advantage of low- or no-interest credit card offers. A SurveyMonkey poll conducted in August for the CNBC cable TV network and the Acorns investment platform found American adults generally were saving more and spending less during the pandemic compared with before the pandemic.

“People’s pocketbooks — and plans — have been buffeted by the pandemic economy, and widespread financial anxiety is leaving customers wary of unchecked spending,” Jon Cohen, chief research officer at SurveyMonkey, said in a news release.