March 31, 2011

Current averages:

• Average consumer credit card rate, overall market: 16.89 percent.
• Average credit card rate, non-reward consumer cards: 15.35 percent.
• Average consumer reward credit card rate: 17.55 percent.
• Average student credit card rate: 16.48 percent.
• Average business credit card rate (non-reward): 14.72 percent.
• Average business reward credit card rate: 16.21 percent.

Four of the six categories of credit card offers listed above saw a rise in average credit card rates during the second half of March. This may be only the beginning of a trend towards higher credit card rates.

In part, credit card rates are responding to a trend towards higher inflation. If this trend continues–and it seems to be gathering steam–look for more upward pressure on credit card rates. After all, inflation effectively reduces the profit margin banks earn on credit cards. If inflation rises, banks need to compensate by raising their interest rates on credit cards.

The most recent Consumer Price Index update showed that consumer prices increased by 0.5 percent in February–a rate that, if continued, would lead to annual inflation of greater than 6 percent. The February release was the third consecutive monthly indication of higher inflation, following monthly increases of 0.4 percent in both December and January.

The more this inflation trend builds, the more credit card comanies will be under pressure to raise their interest rates.

Consumer credit card rates

Consumer credit card rates rose to an overall average of 16.89 percent, up from 16.82 percent in mid-March. Both the reward and non-reward categories showed increases in their average rates.

The average rate for consumer reward credit cards reflected the small rise in the overall market for consumer credit cards, rising to 17.55 percent.

The increase was similar for non-reward consumer credit cards, which edged up to 15.35 percent. This similarity suggests that the market is responding to broad economic trends rather than making a distinction between reward and non-reward cards. While consumer creditworthiness and the cost of financial regulation remain concerns for the industry, the most pressing economic trend may well be the inflation pressure described in the previous section.

Business credit card rates

Business credit card offers were not affected by the increased rates in other categories. Non-reward business credit card rates remained at an average of 14.72 percent, while business reward credit cards remained at an average of 16.21 percent.

In general, businesses have fared better than individuals so far in this economic recovery, as growth has picked up more rapidly than hiring. This might give credit card companies a reason to be especially interested in business customers right now, and therefore they are more likely to hold the line on business credit card rates even as other rates are rising. However, credit card companies won’t be able to hold the line against rising inflation indefinitely.

Student credit card rates

Student credit card rates reflected the broader trend in credit card rates by rising in the second half of March. On average, rates on student credit card offers rose very slightly to 16.48 percent. This average increase would have been even greater except for a change in the mix of student credit card offers available, with one student card which had relatively high rates not currently being offered.

Good credit vs. bad credit

Rates on credit card offers rose for both consumers with excellent credit and for those with average credit in the second half of March. This is consistent with the thesis that credit card companies are reacting to a broader economic trends such as inflation. Currently, the spread between rates for customers with excellent credit and those with average credit is 4.0 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 Bank of America, HSBC, Citi, American Express, and Capital One. The information compiled not only represents 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 in the differences between rates for those markets.

Published 03/31/11