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Consumer credit card rates rise as the economy strengthens

 

May 31, 2013

Current averages:

  • Average consumer credit card rate, overall market: 17.05 percent
  • Average consumer non-rewards credit card rate: 15.32 percent
  • Average consumer rewards credit card rate: 17.79 percent
  • Average student credit card rate: 17.42 percent
  • Average non-rewards credit card rate: 14.74 percent
  • Average business rewards credit card rate: 15.50 percent

The U.S. bank prime rate remained at 3.25 over the second half of May. Meanwhile, most credit card rates also remained unchanged, though a rise in one of the consumer non-rewards rates tracked by this survey pushed the average for that category, and for consumer cards overall, higher.

More changes may be coming for credit card rates in the weeks ahead, as changes in the economic outlook pushed some key interest rates, such as mortgage rates and bond yields, upward throughout the month of May.

Here are some key factors credit card companies will consider when setting rates in the weeks ahead:

  1. The economy seems to be improving. There has been a spate of encouraging economic news lately, with the most recent example being that housing prices just posted their strongest year-over-year gains since 2006. This economic recovery has had false starts before, so the next couple of monthly employment reports will be crucial to judging whether or not the recent momentum can be sustained.
  2. The Federal Reserve may soon ease its intervention in interest rates. If the economic improvement is for real, the Federal Reserve will be able to back off from its monetary easing policies. This would allow interest rates to rise across the yield curve, from short-term to long-term.
  3. Inflation has all but disappeared. The Consumer Price Index followed up a 0.2 percent decline in March with a 0.4 percent decline in April. With prices falling recently, inflation for the year ending April 30 was just 1.1 percent. Inflation can be a key driver of interest rates, which generally strive to stay ahead of rising prices, but this has been a non-issue lately.

The first two of these factors would tend to push rates higher, but since credit card rates did not fall as much as most other interest rates in response to the weak economy of recent years, they may not have as far to bounce back as the economy strengthens. Also, if inflation remains mild, that will take some of the upward pressure off of credit card rates.

Consumer credit card rates

The average rate for consumer non-rewards credit cards rose by 13 basis points while the average for rewards credit cards stayed the same. As a result, the spread between rates for the two categories narrowed to 2.47 percent. This narrowing improves the relative attractiveness of consumer rewards programs, and reverses a trend which had seen that spread widen steadily since the end of January.

Student credit card rates

There were no changes in the student credit card rates tracked by this survey, allowing college students to finish up their spring semesters without having to adjust to changes in their credit card terms.

Business credit card rates

Both business rewards credit cards and non-rewards cards saw no changes in rates during the latter half of May, continuing a trend of very little change in business credit card rates so far this year.

Good credit vs. average credit

While consumer credit card rates rose overall, the spread between rates for customers with excellent credit and those with average credit narrowed by 3 basis points, to 4.10 percent. This is on the heels of a narrowing of this spread by 4 basis points in the last survey. A narrowing of credit spreads like this is consistent with an improving economy. Interest rates may continue to rise on the whole, but credit spreads could narrow as economic strength makes credit card companies less concerned about credit risk.

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 05/31/13


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