Why aren't credit card APRs at all-time lows?

For most of this year, interest rates have been historically low -- on everything but credit cards.

The back story on these low rates traces back to 2008, when the Federal Reserve enacted several policy measures specifically designed to drive down interest rates. While rates on other loan products during that time fell, as the Fed expected, credit card APRs have risen, and continue to rise.

Since the first week of January, the annual percentage rate, or APR, for variable-rate credit cards -- the most commonly available -- has increased to 15.31 percent from 14.56 percent.

In contrast, rates on home equity loans, home equity lines of credit and new-car loans carved out record lows earlier this year; and the 30-year fixed mortgage rate, while above its record low of 3.5 percent, is now hovering around 4.6 percent, still low by historical standards.

It's not like credit card holders are behaving badly, justifying higher APRs. The opposite is true. The percentage of credit card accounts that are at least 30 days past due are at almost 23-year lows, according to the American Bankers Association. The average outstanding credit card debt is well below levels seen in 2008.

So, what gives? Three are three main reasons for the high rates -- the type of debt, government legislation and you.

Blame the loan type

Generally, credit card rates will always be higher than those of other loan types because credit card debt is unsecured, says Robert Hammer, founder and CEO of R.K. Hammer, a bank card advisory firm in Thousand Oaks, Calif.

Mortgages are backed by houses, and auto loans are secured by cars. That means a lender can take the house or the car if the borrower fails to make payments. Credit card issuers don't have that recourse. Defaults and charge-offs are typically higher on credit cards than on secured loans, too, he says. So, the risk that the issuer could lose out is higher than for a mortgage lender or auto lender.

Blame legislation

That explains the difference in rates between loan types, but not why credit card rates are moving in the opposite direction from other loan rates. For that, the real culprit is a little piece of legislation called the Credit Card Accountability, Responsibility and Disclosure Act of 2009.

"The biggest rout in credit card rates occurred in 2009 and 2010 around the implementation of the CARD Act," says Mike Masasi, senior analyst at Mercator Advisory Group. "Issuers had revenue avenues restricted."

The profit-killers in the CARD Act included:

  • No interest rate increases in the first year.
  • Increased rates don't apply to new charges.
  • Caps on penalty fees.
  • Elimination or limitation of other fees.
  • Restrictions on billing and payment practices.

To recoup the lost income, companies started raising interest rates and annual fees, says Roy Persson, director of competitive tracking services at Ipsos Loyalty, a research services company. The average annual fee last year was $113, compared with $80 in 2010.

"Legislation has created a less profitable unit of the bank, and they have to search for ways to recover that," he says.

Blame yourself?

Consumers can't affect the APRs companies assign to their credit cards, but they can influence whether they receive a rate that's on the higher or lower end of a card's APR range. Many credit cards come with a range of APRs. Which one you get depends largely on your credit score, says Bill McCracken, president of financial services research firm Synergistics Research Corp. in Atlanta.

"You and your neighbor may have the same credit card, but I bet you both have very different interest rates on them," he says.

If you have a great FICO credit score, generally above 720, then you should get an interest rate between 10 percent and 15 percent, he says. Those with credit scores between 680 and 720 will receive an APR between 15 percent and 20 percent. Credit scores between 620 and 680 will probably get you an APR in the 20s.

If you feel like your APR is too high, McCracken recommends requesting a decrease from your issuer if you have a good payment track record. Customer service representatives often have some authority to reduce rates by between 1 percent and 3 percent, he says. If your issuer refuses, politely tell the issuer that you plan to transfer your balance to a new card that sent an offer for a lower rate.

"If the issuer still doesn't budge, then you have to vote with your feet and activate that balance transfer," McCracken says.

Of course, the only time the APR matters for a credit card is if you don't pay off your balance every month, says John Ulzheimer, credit expert at CreditSesame.com. For mortgages and auto loans, interest rates are always material because consumer will always pay the interest on the loan.

"It's well within your control to pay no interest on your credit card," he says. "But there's no such thing as an interest-free mortgage."



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