Credit card rates have once again resumed their rise.
| CreditCards.com's weekly rate chart | |||
|---|---|---|---|
| Avg. APR | Last week | 6 months ago | |
| National average | 12.06% | 12.04% | 11.58% |
| Balance transfer | 10.14% | 10.14% | 10.14% |
| Low interest | 10.53% | 10.53% | 11.05% |
| Business | 11.41% | 11.41% | 16.74% |
| Cash back | 11.63% | 11.63% | 12.71% |
| Rewards | 12.10% | 12.10% | 11.32% |
| Instant approval | 12.99% | 12.99% | 11.29% |
| Airline | 13.48% | 13.31% | 11.60% |
| Bad credit | 14.29% | 14.29% | 12.15% |
| Student | 14.45% | 14.45% | 14.21% |
| Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed above. (Introductory, or teaser, rates are not included in the calculation.) | |||
| Source: CreditCards.com | |||
| Updated: 07-30-2009 | |||
Following a brief pause last week, the national average annual percentage rate on new credit card offers rose for the fourth time in the past five weeks to 12.06 percent, according to the CreditCards.com Weekly Credit Card Rate Report.
Analysts say banks are raising APRs to guard against potential losses on unpaid accounts. Increasing APRs "may not be unusual in response to the rise in unemployment," says George Mokrzan, senior economist, Huntington Bancorp, in Columbus, Ohio. Mokrzan notes that as unemployment levels rise, credit quality -- or consumer credit scores -- tends to fall. Since banks price for risk, such an environment means higher borrowing costs for consumers.
That challenge for banks has been combined with the passage of laws that will eventually restrict lenders from punitive pricing, a long-standard practice in the industry. For banks, "why wouldn't you pick the highest rate that you could to the point that you don't exclude yourself from being competitive?" asks Dennis Moroney, research director with advisory services firm TowerGroup.
Pay in full, no pain
Regardless of what banks do, he stresses that the introduction of higher APRs will have no impact for cardholders who pay off their balances every month.
Paying their bills in full isn't the only opportunity for rate relief. Economic improvement could prompt banks to begin easing back on APR hikes. "In general, as the economy starts to recover and start to grow, you'll see an improvement in credit quality and edging down of some of those increases we've seen recently," Mokrzan says.
But for now, banks are raising APRs -- and restricting their lending. On that front, the Federal Reserve's latest Beige Book survey of its regional banks showed credit standards continued to tighten in seven of 12 districts.
"Banks continued to tighten credit standards in the New York, Philadelphia, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts," the Fed report said, adding that for Cleveland and Atlanta, "higher credit standards remained in place, with no change expected in the near term."
Mail offers dwindle
As banks restrict consumer access to credit, consumers are also finding fewer card offers in their mailboxes. Synovate's tracking service Mail Monitor indicated that during the first quarter of 2009, U.S. consumers received 372.4 million card offers, down 67 percent from the 1.132 billion offers received during the same period a year before. Moroney says that those banks still mailing offers are likely targeting those borrowers with good credit.
At the same time, data shows that saving money has overtaken borrowing as a popular consumer activity, with that shift confirmed by the Fed. According to the Beige Book, "consumer loan demand decreased in New York, St. Louis, Kansas City, and San Francisco, stabilized at a low level in Chicago and Dallas, and was steady to up in Cleveland."
As credit card demand overall remains down, those remaining card applicants stand out from the crowd. In some cases, Moroney warns that consumers still seeking plastic may be riskier borrowers than their credit reports indicate. That's because they may be planning to use the cards as an emergency fund in anticipation of a potential life event -- such a job loss -- than no credit score can predict and that would leave them little ability to repay debt. That uncertainty puts an updraft under credit card interest rates, as well.
However, Mokrzan says that many consumers still in the market for cards are likely seeking to legitimately obtain credit and build a credit history. At the same time, banks make it their business to identify those borrowers who are not. "Good bankers will be able to sift through and look at the individual situation," he says.
That ability by banks to make smart lending decisions is key. After moving from a period of excessive lending to the current period of restricted consumer access to credit, the ideal may be somewhere in between.
"What we all have to hope for is that pendulum swing to a more favorable position -- in the middle," Moroney says.
