In contrast to other consumer loans like mortgages, which sank to record-low rates in 2010, average interest rates on credit cards offered to new customers have slowly crept higher in recent years. According to Bankrate.com’s weekly survey of interest rates, the average fixed rate for purchases was 11.57 percent and the mean variable rate was 12.59 percent on Dec. 14, 2005. Five years later, on Dec. 15, 2010, the average fixed rate was 13.04 percent, and the average variable APR, 14.44 percent.
Will credit card rates rise in 2011? The answer isn’t a simple one. A combination of factors influence the interest rates offered to new borrowers, including competition, the issuer’s cost of borrowing and the risk in the economy.
“To the extent that inflation increases and the cost of money goes up and the risk continues to remain in the economy, I think there is certainly some pressure for rates to go up,” says Kenneth Clayton, senior vice president and general counsel for card policy at the American Bankers Association.
Folks with less than prime credit who were shunned by credit card issuers during the recession may find it easier to get approved for credit card offers, albeit at a higher cost. The October 2010 Federal Reserve survey of senior loan officers showed that 12.5 percent of banks reported easing their lending standards for credit card application approvals during the previous quarter, while just 2.5 percent tightened standards.
“Our sense is they’re starting to move beyond just the safest places to be and are willing to take a little more risk on,” says Clayton.
Once an issuer approves a consumer for a credit card, it’s harder for the creditor to change the interest rate, thanks to recent legislation. The Credit Card Accountability, Responsibility and Disclosure Act of 2009, or Credit CARD Act, which was signed into law in May of that year, placed new restrictions on rate increases. Under the law, issuers can only hike the APR on an existing balance under four exceptions — for instance, when a promotional rate has expired or the account has become 60 days delinquent. They also have to provide 45 days’ notice for interest rate increases that will be applicable to new transactions.
Instead of higher rates, consumers may see account changes of a different sort — particularly pricier fees. “Because of the restrictions on how easily, or how swiftly, or how much APRs can be changed due to this legislation, issuers’ attention is naturally going to be on the other source of revenue they have, which is fee income,” says Robert Hammer, chairman and CEO of R.K. Hammer, a bank card advisory firm based in Thousand Oaks, Calif.
Hammer contends that some fees have already surfaced or increased, such as cash advance fees rising from 2 percent with a $50 cap to 4 percent or 5 percent with no cap. And some issuers have charged fees for customer service calls.
Fees currently account for 48 percent of all revenue for credit card issuers, up from 31 percent 10 years ago, according to R.K. Hammer.
In 2011, more changes will take effect under the risk-based pricing rules and the Dodd-Frank Wall Street Reform and Consumer Protection Act, though none of the new requirements deal directly with credit card practices as the CARD Act did.
For individual credit card accounts, it’s up to consumers to examine their statements and read correspondence from their issuers to learn of changes to their accounts. The CARD Act doesn’t require issuers to announce certain changes, such as account closure and credit limit reductions, before they take effect.
Bankrate has a comprehensive analysis of where all sorts of interest rates are likely headed in 2011, and how these moves will affect you. Go to 2011 Interest Rate Forecast to view the full report.