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Widespread reductions in credit card rates

 

February 28, 2013

Current averages:

  • Average consumer credit card rate, overall market: 16.82 percent
  • Average consumer non-rewards credit card rate: 15.19 percent
  • Average consumer rewards credit card rate: 17.52 percent
  • Average student credit card rate: 17.42 percent
  • Average business non-rewards credit card rate: 14.74 percent
  • Average business rewards credit card rate: 15.51 percent

The U.S. bank prime rate was unchanged in late February, at 3.25 percent.

While the prime rate remained unchanged, there was an unusual amount of activity in credit card rates -- all of it in the form of lower interest rates. Average interest rates fell in the consumer non-rewards, student, and business rewards categories.

Why did credit card rates decline in late February? One possible cause is the increased attention on the budget showdown in Washington, D.C. With the federal budget facing sequestration -- an automatic series of spending cuts -- many economists are lowering their growth expectations for the year ahead. Slower growth is generally associated with lower interest rates.

Though credit card rates declined in the latter half of February, it is important to put these declines in perspective. Despite the changes, consumer and business credit cards are no better off than they were at the start of the year. Student rates have improved so far in 2013, but are still higher than they were five months ago. Overall, the credit card market saw some rate increases in January and early February, followed by some decreases in recent weeks. It is possible that rather than representing any sort of trend, these changes are simply experimentation on the part of credit card companies -- tweaking rates up and down a bit to find the right trade-off between profit margins and popularity.

Whatever the reasons for recent changes in credit cards, these fluctuations are a reminder that it is important for consumers to stay informed about the credit card market and be alert for changes that might bring better rate opportunities.

Consumer credit cards

The average rate for consumer non-rewards credit cards dropped by 24 basis points, to 15.19 percent. This brought the combined rate for consumer rewards and non-rewards cards down to 16.82 percent. Despite the decline in non-rewards credit card rates, they are still higher than they were at the start of 2013.

In contrast to the activity in non-rewards credit cards, consumer rewards credit cards have remained unchanged so far in 2013. The decline in non-rewards rates while rewards credit cards stood pat meant that the spread between the two averages widened, to 2.33 percent. This widening represents an increase in the relative cost of rewards programs.

Student credit cards

The average student credit card rate dropped by 12 basis points, to 17.42 percent. This was the first change for student credit cards since November, and represents a welcome change in the trend for these cards. Prior to the recent decline in rates, the last six rate changes, dating back to last June, had all been rate increases.

Business credit cards

The average rate on business rewards credit cards dropped by nearly one-half of one percent to 15.51 percent. With business non-rewards credit card rates remaining unchanged, this narrowed the spread between rewards and non-rewards credit card rates to just 0.77 percent.

Despite the significant drop in business rewards credit card rates, all it means is that these rates have come full circle in a short period of time. Dropping to 15.51 percent means these rates have returned to where they started 2013.

Good credit vs. average credit

The decline in consumer non-rewards credit card rates took place across all rate tiers, so there was little effect on the relationship between rates for people with excellent credit and those for people with average credit. This spread in rates dropped by just 0.03 percent, to an even 4.0 percent.

In total, IndexCreditCards.com surveys information from some 50 different credit cards, and includes multiple credit-rating tiers from many of those cards. Examples of offers surveyed include American Express, Capital One, Chase, Citi, Discover, and other MasterCard and Visa branded cards. The information compiled not only demonstrates trends in credit card rates over time, but also indicates the different values credit card companies put on different target markets (consumer, business, etc.), as evidenced by the differences between rates for those markets.

Published 03/01/13 (Modified 03/19/13)


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