Credit card interest rates are the necessary evil that accompanies the ease and convenience of credit cards. As their main source of revenue, credit card companies love interest rates; but to customers they always seem too high. While U.S. levels are not as high as they have ever been, average interest rates are approaching the high levels ever.
There are still credit cards with rates that are lower than average, and you can find them by using the FREE credit card chaser tool now!
Credit card rates are affected by many different factors. The economy, the Prime Rate, and federal regulations all affect the average interest rates charged by credit card companies. Using credit cards sparingly is really the only way for consumers to control their own credit card interest rates.
Highest Rate Allowed by the Law
While most states have usury laws that are meant to protect consumers from high interest rates, a 1978 Supreme Court ruling made those laws useless when it comes to credit card interest rates. The ruling in Marquette vs. First Omaha Services decided that banks and credit card companies could offer credit cards to customers in other states at the interest rates allowed in the home state of the banks or credit card companies, not the customers.
Banks and credit card companies moved to states that had few rules concerning interest rates, and they can offer whatever rates they want to customers anywhere in the U.S.
States such as Connecticut might have a cap on credit card interest rates at 12%, but credit card companies from South Dakota can offer higher interest rates to those customers because South Dakota has no cap on interest rates.
What’s Driving Rates Up
Most credit card rates are variable, and that means that they are essentially tied to the Prime Rate. When the Prime Rate goes up, the credit cards’ interest rates go up. However, a graph from onlyinforgraphic.com shows an interesting trend from 2007 to 2010. The Prime Rate has been steadily falling from 7.75% in 2007 to 3.25% at the end of 2008; but average credit card interest rates have continued to rise, steadily moving away from the Prime Rate.
One factor that led credit card companies to raise interest rates was the Credit CARD Act of 2009. The Act ruled that credit card companies could not change interest rates for a year without notifying customers of an interest rate increase. While the law didn’t cap interest rates, it did make it harder for credit card companies to change rates. It also cut into revenues by limiting the fees credit card companies could charge.
So before the new law went into effect in 2010, credit card companies sent out a prestrike; they raised interest rates on most customers, because they wouldn’t be able to raise them later, according to US News Money. Those rates really haven’t come back down in any significant amount.
Another reason that credit card interest rates continue to rise is the Wall Street economic bust in 2008, according to USA Today. Credit card companies need further sources of revenue to replace those lost by the slump in the mortgage industry and the tightening of requirements for credit.
BankRate puts the average U.S. interest rate for variable rate cards at 14.55% and fixed rate cards at 13.81% for March 2012. The Federal Reserve calculated the average interest rate for credit cards in the end of 2011 as 12.36%, so the rate has risen over a least a percentage point. The Prime Rate remains steady at 3.25%.
Another study by BankRate that stretched from 1996 to 2005 shows that fixed-rate credit card rates reached over 16.50% around 2000, and that they were above 17% in 1996. Those rates did closely mirror highs and lows in the Prime Rate, however.
What This Means for You
Credit card companies seem intent on maintaining revenue levels that match those prior to the Credit CARD Act and economic crisis of 2008; though they seem to forget that those revenues came from practices that were deemed illegal and underhanded by the U.S. government. So every credit card consumer should be prepared for similar dealings as credit card companies try to boost profits at the expense of consumers.
The worst culprit is the consumer, because they continue to accept higher credit card rates. If consumers refused to pay such high rates by not using the cards in the first place, then the market would shift to a lower rate to meet demand.
CNN Money reported on the Premier Bankcard in 2011, which had an interest rate of 79.9%. Marketed to those with truly bad credit, Premier lowered the interest rate to 59.9% to avoid so many customers defaulting, but ended up discontinuing the card because it wasn’t profitable. While the high interest rate is impressive, an even bigger number is even more so: almost 300,000 people were customers of Premier’s 59.9% interest credit card.
Tell credit card companies you won’t pay high interest rates anymore by using the FREE credit card finder to find the credit cards with the best rates now!
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- History of Credit Card Rates
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- Wall Street Journal Prime Rate
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