American credit cardholders will save about $600 million in additional interest charges over the next twelve months thanks to today’s action by the Federal Open Market Committee. With the prime rate expected to drop to 5.00% later today, the lowest in 40 years, credit card rates will be pushed to their lowest level ever. As of October 1, average rates have plunged to 14.48%. Today’s rate cut will most likely push average card interest rates to about 14.20%, the lowest level in the industry’s 25 year industry. The rate cut is good news, coming just ahead of the critical holiday shopping season.
However, today’s half-a-point rate cut will not benefit all cardholders.
Floor rates, fixed rates, and the rate adjustment calendar will prevent more than half of American credit cardholders from receiving any benefit from today’s rate reduction.
About 25% of the 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 June rate cut.
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. Nearly 90% of MBNA’s cardholders, the second largest issuer in the U.S., have fixed rates.
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 base their rates on the highest prime rate with the 90 days preceding each billing cycle. Such cardholders will not benefit from today’s rate cut until sometime next year.
Nevertheless, since the first of this year, the Fed rate cuts have reduced overall credit card interest costs for consumers by $11 billion annually or an average of about $140 annually per U.S. household with credit cards. American consumers currently owe $672 billion on all credit cards. About $570 billion of this debt is owed on major cards such as VISA, MasterCard, American Express and Discover. Approximately $102 billion is owed on retail or store credit cards.
Average Credit Card Interest Rates Dec00: 16.57% Jan01: 16.49% Feb01: 16.31% Mar01: 16.16% Apr01: 15.91% May01: 15.83% Jun01: 15.43% July01: 15.02% Aug01: 14.98% Sep01: 14.81% Oct01: 14.48% Source: CardWeb.com