May 31, 2015

Current averages:

• Average consumer credit card rate, overall market: 17.24 percent
• Average consumer non-rewards credit card rate: 15.77 percent
• Average consumer rewards credit card rate: 17.87 percent
• Average student credit card rate: 17.04 percent
• Average business non-rewards credit card rate: 14.89 percent
• Average business rewards credit card rate: 15.50 percent

The U.S. bank prime rate remains at 3.25 percent.

Even without monitoring credit card offers, it would have been reasonable to guess that credit card rates had risen over the past month — all of the signs are there.

Consumer non-rewards credit card rates rose by a hefty 20 basis points in May, marking the third consecutive monthly increase for this category. This pushed the overall rate for consumer cards (rewards and non-rewards cards) up by 6 basis points to 17.24 percent. Both consumer non-rewards cards and the overall consumer category are now at the highest levels they have seen in the more than four years for which this survey has records.

What are the signs that point to a rise in credit card rates? Here are three prominent ones:

1. A turning point in Federal Reserve policy. Following its March meeting, the Fed’s Open Market Committee took the unusual step of stating that it did not expect to raise interest rates in its April meeting. Following the April meeting though, the Fed gave no such assurances. Barring a reversal of economic trends, a rise in rates is expected sometime within the next few Fed meetings.
2. A revival of inflation. Retail gasoline prices have risen some 34 percent since the end of January. Assuming this puts upward pressure on inflation as a whole, expect interest rates to rise in response.
3. Bond yields have risen sharply. The bond market is perhaps the most sensitive instrument for measuring interest rate trends. Bonds are traded in large quantities by investors who have to anticipate future developments because of the long-term commitment bonds represent. Treasury bond yields rose sharply in May, which may be partly a reaction to the strengthening economy, and partly a reaction to inflation signals. Either way, bond investors believe the future holds higher interest rates.

Credit card companies do not all react to economic trends in the same way or at the same time. However, the climb in consumer credit card rates for three consecutive months is significant, and do not be surprised if rates continue to move upward in the months ahead.

Consumer credit cards

The 20 basis point hike in consumer non-rewards credit cards not only continued a rising trend for this category, but it also continued a trend towards a narrowing of the spread between rewards and non-rewards card rates. This spread has narrowed by 35 basis points in just three months, bringing it down to 2.10 percent. That is the lowest this spread has been in more than two years.

Rewards credit cards generally carry higher rates than non-rewards cards, reflecting the cost to credit card companies of providing rewards to their customers. So, if the spread in rates between rewards and non-rewards credit cards is narrowing, it means the potential cost to consumers of participating in rewards programs is shrinking. Still, the surest way to limit the cost of rewards programs is to pay the credit card balance off in full each month, to avoid interest charges.

Student credit cards

Student credit card rates remained unchanged in May.

Business credit cards

Both the rewards and non-rewards categories of business credit cards remained unchanged during May.

Excellent credit vs. average credit

Changes in the consumer credit card category narrowed the spread between the highest and lowest rate tiers by 5 basis points to 4.01 percent. A narrowing of this spread would be consistent with increased confidence in the strength of the economy.

In total, IndexCreditCards.com surveys information from nearly 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 05/31/15