October 31, 2012

Current averages:

• Average consumer credit card rate, overall market: 16.89 percent
• Average consumer non-rewards credit card rate: 15.15 percent
• Average consumer rewards credit card rate: 17.64 percent
• Average student credit card rate: 17.47 percent
• Average business non-rewards credit card rate: 14.74 percent
• Average business rewards credit card rate: 15.74 percent

The U.S. bank prime rate remained unchanged at 3.25 percent.

In contrast to the violence of Hurricane Sandy which bore down on the northeastern U.S. in late October, credit card rates for the second half of the month were relatively calm. In the long run though, the damage caused by this storm may also leave its mark on credit card rates.

The only category of rates to change since the last IndexCreditCards.com survey was student credit cards, and this was the result of a change in just one credit card offer. However, Hurricane Sandy could add to inflation pressures which were already building, forcing credit card companies to raise their interest rates.

A storm like Sandy can create near-term inflation pressures because it affects both supply and demand. On the supply side, Sandy threatened east coast oil refineries, and shortages of other goods produced in or transported through the northeast could develop as power outages and equipment damage interrupt the supply chain. Constricted supplies tend to result in higher prices.

Meanwhile, rebuilding the damage caused by Sandy will create new demand for building and construction materials and equipment. A surge in demand can also be inflationary. What’s more, these supply and demand forces are not working in isolation. Inflation was already higher than normal in August and September, so these new inflation factors are taking place in a context of prices that were rising anyway.

All of this is very relevant to credit cards, because inflation squeezes the profit margins of credit card companies. The way to protect those margins is to raise credit card rates, and the stronger inflation becomes, the more it will force credit card companies to consider rate increases.

Consumer credit cards

Rates were unchanged for both consumer non-rewards and rewards credit cards. Neither type of consumer cards has changed since early August, creating a stable environment which makes it easier for consumers to compare rates and shop for the best deals.

Student credit cards

Student credit card rates edged upward by 13 basis points in late October, to 17.47 percent. This was the second rate increase for student credit cards in the last two months, making it the most changeable category of rates. These changes can help students learn about one of the important realities of personal finance. Even after you’ve shopped around and compared rates, credit card terms can change, so it is even more important to keep an eye on rates after you’ve signed up for a card than it is when you are choosing a card.

Business credit cards

Business credit cards have been the most stable category of credit card rates, with no changes to non-rewards or rewards credit card offers since late July.

Good credit vs. average credit

With no change in consumer credit card rates, the spread between average rates and those for customers with excellent credit remained at 3.83 percent. This rate differential represents the price customers pay for having any weakness in their credit histories. Customers who have average or below-average credit can still avoid paying this price if they pay their balances off in full every month. Not only will doing so result in no interest charges, but it will also help those customers improve their credit histories so they can earn better rates in the future.

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 11/01/12