Credit Card Rates: Why Have They Stayed So High?

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You've probably heard a lot about the record low mortgage rates consumers have enjoyed in recent years. Ever wonder why credit card rates haven't followed suit - and what you can do about it?

While most interest rates dropped sharply in the wake of the Great Recession, rates on credit cards only came down a little bit. Looking at inflation and default conditions, logic would dictate that credit card rates should be lower, but they have seemed isolated from these economic trends. Some well-intentioned regulation might be at fault, but there are steps consumers can take to get their credit card rates down.

Why Credit Card Rates Should Be Lower

Think of interest on credit cards as a cake consisting of three layers. One is to make up for inflation, one is to make up for defaults, and the other is to provide income to the card issuer. If any of these layers changes in size, the result should be reflected in the overall rate. However, that has not really happened.

According to data from the Federal Reserve, at the end of 2007 (just prior to the start of the Great Recession) the average credit card customer was paying a rate of 14.38 percent. Inflation, as measured by the Consumer Price Index, was running at an annual rate of 4.1 percent, and defaults on bank cards were at 3.94 percent.

By late 2014, the inflation rate had come down to 1.7 percent, and defaults down to 2.60 percent. Combined, those two factors have fallen by 3.74 percent. However, the rate paid by the average credit card customer had fallen by just 1.2 percent, to 13.18 percent. In other words, rates on credit cards have dropped by about 2.5 percent less than one would have expected given the change in economic conditions.

By way of contrast, over the same period that rates on credit cards were falling by just 1.2 percent, 30-year mortgage rates fell by about two percent, and auto loan rates fell by over three percent.

Why Credit Card Rates Have Stayed High

So why has interest on credit cards not responded to changing economic conditions, or fallen as far as other interest rates? Some point to 2009's CARD Act as a reason. The CARD Act put in place several protections for consumers, including limitations on when and how credit card companies could raise interest rates. The problem is that if credit card companies know they have limited latitude to raise rates, they are going to be especially hesitant to lower rates even when market conditions warrant it. Under the circumstances, what seems to have happened is that credit card companies have left themselves a cushion of safety against the possibility of needing to raise rates.

By effectively making credit card rates less variable, the CARD Act may yet work in favor of consumers the next time there is a rising interest rate environment. During the falling rate environment of recent years, though, the CARD Act may have prevented consumers from enjoying as much of a drop in rates as they otherwise would have.

What You Can Do to Pay Less Credit Card Interest

It may be the regulation or it may be something else, but whatever the reason, rates on credit cards have not fallen much in recent years. So, if you want to pay less credit card interest, it's up to you to take action. Here are some things you can try:

  1. Keep your credit rating in tune. If you have serious credit problems, it can take a while to improve your credit history, but often a credit rating can be nudged upward just by improving your financial habits. Better budgeting to keep your card balances under control and a payment system that makes sure your obligations are met on time can be excellent places to start. You can track your credit score for free at LendingTree.com.
  2. Monitor your statements. Is the rate you signed up for the rate you are getting now? Credit card companies have to send out disclosures of rate changes, but these are often buried in lengthy, technical documents. The surest way to keep tabs on the rate you are paying is to monitor each statement, and if your rate starts to edge up, start looking for a new card.
  3. Prioritize your credit cards. Like most people, you probably have multiple credit cards in your wallet. Do you automatically reach for the one with the lowest rate first? If not, change your habits so you do most of your buying with the lowest-rate card you have.
  4. Shop actively for credit cards. One thing consumers have in their favor is that the credit card market is quite diverse, with several different issuers offering cards. Do some comparison shopping whenever you choose a card, and keep an eye on the market even when you aren't currently looking for a card, in case a better rate deal comes along.
  5. Pay your balance on time and in full. This may not always be possible, but it should be the goal of every credit card user. Do this, and you won't have to worry about the interest rate -- your credit card can be a free resource rather than a monthly expense.

It would be nice if the credit card marketplace would give consumers as big a break on interest rates as they have gotten from mortgages and auto loans. However, that just hasn't happened, so the only thing that is going to earn you a lower credit card rate is taking action yourself.

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