January 31, 2013

Current averages:

• Average consumer credit card rate, overall market: 16.89 percent
• Average consumer non-rewards credit card rate: 15.43 percent
• Average consumer rewards credit card rate: 17.52 percent
• Average student credit card rate: 17.54 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 remained at 3.25 percent in the second half of January.

An increase in the average consumer non-rewards credit card rate sent the overall rate for consumer credit cards up by 0.09 percent. All other categories of credit cards were unchanged for the period.

One of the challenges of monitoring credit card rates is trying to discern whether a change in rates represents the start of a new trend, or is an isolated incident. There are three reasons to believe that the rise in consumer non-rewards cards in the latter half of January was just an isolated occurrence:

1. The change was caused by a rate increase in just one credit card offer, rather than by a more systematic move by credit card companies to raise rates.
2. An increase in rates seems inconsistent with the inflation environment, which has been flat-to-negative in recent months.
3. The increase also seems inconsistent with an economic growth rate that is still sluggish, at best. On January 30, the Bureau of Economic Analysis announced that the U.S. economy actually shrunk in the fourth quarter on an inflation-adjusted basis. This does not necessarily signal that the U.S. is slipping back into recession — this was an advance estimate of GDP growth, and those first estimates are usually somewhat off the mark. Also, optimism about the economy seems to have improved since the resolution of the fiscal cliff melodrama. Even so, while the economy may still be growing, it certainly hasn’t shown signs of the type of robust growth that would be driving interest rates higher.

Credit card companies respond to changes in the general interest rate environment, but they also make adjustments according to their own individual profit and credit risk profiles. Until there is a consistent flow of changes in one direction or another, it is reasonable to assume that late January’s rise in consumer non-rewards credit card rates was due to company-specific factors.

Consumer credit cards

The change in consumer credit cards affected the average rate for non-rewards cards, which rose by 32 basis points to 15.43 percent. Consumer rewards credit cards remained unchanged.

Because the average rate for non-rewards credit card offers rose while the average for rewards credit cards did not, the average spread between the two dropped to 2.09 percent – the lowest level in at least two years. When the spread between rewards and non-reward rates narrows, it makes rewards programs relatively more attractive.

Still, whether or not a rewards program is a good deal depends on the value each consumer gets out of the rewards, compared to any extra interest they pay. The way to make the most out of this trade-off is to pay the credit card bill in full every month, so as to accumulate rewards without having to pay any interest at all.

Student credit cards

Student credit card rates have been unchanged since mid-November of 2012.

Business credit cards

Both business non-rewards and business rewards credit cards remained unchanged in January.

Good credit vs. average credit

The change in consumer non-rewards credit card rates did slightly widen the spread between rates for people with excellent credit histories and those for people with average credit. This spread increased by 5 basis points to 4.03 percent, meaning that some consumers now could pay a higher price for marks against their credit histories.

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 02/01/13