Credit card rates: Gap grows between rewards and non-rewards cards
July 31, 2011
- Average consumer credit card rate, overall market: 16.50 percent
- Average consumer non-rewards credit card rate: 14.72 percent
- Average consumer rewards credit card rate: 17.27 percent
- Average business non-rewards credit card rate: 14.47 percent
- Average business rewards credit card rate: 16.05 percent
- Average student credit card rate: 16.67 percent
The US bank prime rate set by the Federal Reserve remained unchanged at 3.25 percent, where it has been since January of 2009. Many credit card rates are based in part on the prime rate.
There were changes in three of the five credit card categories in the second half of July, but these changes seem relatively trivial against a backdrop of a budget discussion that could be a real game-changer for credit card rates.
If the US government does not find a solution to the debt ceiling and budget issue, default on some government debts is one possibility. It has been widely speculated that this would cause interest rates generally to rise, as lender confidence would be dealt a heavy blow. Credit card rates would be likely to get caught up in such a general increase in interest rates.
Less direct consequences are possible as well. Defaults could cause financial distress for individuals and organizations owning bonds, and budget cuts or an impaired ability to borrow could result in a reduction in government spending. In either case, there could be a ripple effect of more people having difficulty paying their bills, making it necessary for credit card companies to charge higher rates to cover their risk.
It is impossible to know what will happen if the U.S. government is unable to meet all of its financial obligations, simply because that has never happened before. It is entirely possible that such an outcome would shake up the relative calm that credit card rates have exhibited over the past few months.
Consumer credit card offers
Rates on consumer credit cards rose slightly overall, increasing to an average of 16.50 percent by the end of July, from 16.43 percent in the middle of the month. This increase was the net result of moves in different directions by rewards and non-rewards credit cards.
Non-reward credit card offers declined to 14.72 percent from their previous level of 14.88 percent. Meanwhile, reward credit card offers rose to 17.27 percent from 17.09 percent.
The widening of the spread between rewards and non-rewards cards makes this a good time to re-evaluate the relative benefits of rewards credit cards. Credit card customers who carry a balance should try to quantify how much they are likely to be able to take advantage of rewards programs, and compare this amount with the additional interest they are likely to pay on rewards cards.
Business credit cards
The average of business non-rewards credit card offers fell to 14.47 percent from 14.60 percent, while business rewards credit cards remained unchanged at an average of 16.05 percent.
As with consumer credit cards, business credit cards saw a widening in the spread between rewards and non-rewards programs. This underscores the importance of being able to quantify whether the financial benefit of rewards programs is worth the possibility of paying more interest.
Student credit card offers
The average of student credit card rates remained unchanged at 16.67 percent. This is currently the longest stretch without a change for any of the five credit card categories surveyed.
Good vs. average credit
The spread between average rates for customers with strong credit histories and those for customers with average credit declined to 4.02 percent in late July. As of the middle of the month, this spread had been 4.10 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 institutions surveyed include American Express, Capital One, Chase, Citi, Discover, MasterCard, and Visa. 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 07/31/11 (Modified 08/15/11)