Consumer Payment Card News

Rate Damper

Credit card rates have declined significantly this year, but not as significantly as the prime rate. This week’s prime rate decline, from 6.75% to 6.50%, will not be passed on to many cardholders due to the pricing policies of some issuers. Since the first of this year, average bank credit card rates have dropped from 16.57% to 15.02% while the prime rate has dropped three full points from 9.50% to 6.50%. About one fourth of credit cards offering variable interest rates have minimum (or floor) APRs that were triggered by previous rate cuts. For example, the widely held General Motors MasterCard offers a prime +9.99% APR with a 16.90% minimum rate. The floor was triggered by the last rate cut in June. The most significant factor creating the lag between the rate cuts and credit card rates is the widening use of fixed interest rates. Nearly all major issuers of bank credit cards have migrated toward fixed credit card rates for many of their credit cards over the past two years. Approximately 45% of all bank credit cards today carry fixed interest rates versus less than 20% three years ago. The third factor diminishing the impact of the Fed rate cut on bank credit cards is the rate adjustment policies. While most issuers of variable rate credit cards adjust rates monthly, about 30% adjust rates quarterly. In some cases, the rate adjustments do not reflect the most recent rate cuts. For example Citibank’s Associates National Bank adjusts rates monthly but bases their rates on the highest prime rate with the 90 days preceding each billing cycle. The bad news: credit card issuers will not rollback fixed interest rates, lower floor rates, or change their pricing policies as there is mounting concern over the deterioration in consumer credit quality. Credit card losses have been rising this year due to a resurgence in personal bankruptcies. As many as 1.4 million personal bankruptcies are expected to be filed this year, driven in part by impending legislation to tighten bankruptcy laws.

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