The credit card APR spread between the rates charged across all accounts and the prime rate computed to 1012 basis points (bps) in the fourth-quarter (4Q/19). The average credit card rate charged by the nation’s Top 100 banks hit 14.87% in 4Q/19, down 23 bps from the prior quarter, but up 65 bps compared to 14.22% for 4Q/18. Since December 20, 2018 the prime rate has declined from 5.50% to 4.75%, according to figures gathered by CardData and CardTrak.
During 2019 credit card rates charged by the nation’s Top 100 issuers across all accounts reported to the Federal Reserve were 15.09% in the first-quarter, 15.13% for second-quarter, 15.10% for the third-quarter, and 14.87% for the fourth-quarter. Credit card interest rates on all accounts assessed interest were 16.91% in the first-quarter, 17.14% for second-quarter, 16.97% for the third-quarter, and 16.88% for the fourth-quarter.
Last year the prime rate began at 5.50%, due a 25 bps rate cut on 12/20/18. On 8/1/19 the prime rate declined to 5.25%, on 0/19/19 to 5.00%, and to 4.75% on 10/31/19. However, the 75 bps prime rate decline compares to the 65 bps increase in all credit card rates by the Top 100 banks, based on analysis by RAM Research.
Average credit card rates currently charged by the top issuers of Visa, Mastercard, Discover, and American Express are now at the highest level since 2001 and the spread between the prime rate and credit card interest rates is the highest point since 1993, notes Senior Analyst Robert McKinley of CardFlash, Bankcenter and CardBuzz.
Credit Card APR – Prime Spread
In terms of the spread between average credit card rates and the prime rate, the current spread of 1012 bps, compares 922 bps for 2018, and 864 bps for 2017. The highest recorded spread was in 1992 when the average credit APR was 18.22% and the prime rate was 6.00% for a spread of 1222 bps.
The spread is much wider for assessed interest rates charged for card accounts with balances, rising from 16.86% one-year ago to 16.88% for the fourth-quarter this year.
The year 1992 was a watershed moment in the credit card world when Household Bank and General Motors teamed in September to launch the GM Mastercard, featuring the first variable interest of prime +10.4% or 16.4%. This compared to the fixed 19.80% credit card APRs charged by the top U.S. issuers. The move drove the credit card APR spread down from 1222 bps in 1992 to 727 bps in 1997.
Pivotal Historical Moments
In 1992, more than 90% of all Visa and Mastercards carried fixed interest rates. Today about 95% carry variable interest rates.
The GM Mastercard was similar to move by AT&T and Synovus when the AT&T Universal Bank Visa and Mastercard was launched in September 1990 offering the first no-annual-fee-for-life Visa and Mastercard. The new card product led to an explosion of no annual fee and variable interest rate Visa and Mastercard cards across the credit card industry.
In 1990, despite the competition from the no annual Discover card, more than 90% of Visa and Mastercard carried annual fees. Today, the only cards with annual fees offer either an exceptional low APR, a ton of rewards or cash-back.
Professor Cardworthy notes in his podcast and via YouTube channel the year 1992 was a watershed moment in the credit card world when Household Bank and General Motors teamed in September to launch the GM Mastercard, featuring the first variable interest of prime +10.4% or 16.4%. This compared to the fixed 19.80% credit card APRs charged by the top U.S. issuers. The move drove the credit card APR spread down from 1222 bps in 1992 to 727 bps in 1997.
Banner Year for Card Profits
Credit card ROA (pre-tax return on assets) for 2019 is estimated to rise to 4.80%, compared to 4.60% for the prior year, and compared to 4.45% for 2017. In 1987 pre-tax ROA peaked at 5.00% and bottomed at 1.50% in 2009.
According to R.K. Hammer, credit card portfolio evaluation and sales experts, total revenue increased 10 bps (basis points) to 17.90% for 2019, compared to 17.80% for 2018. Operating expense declined 10 bps YOY (year-on-year) to 6.90%, while charge-offs remained steady at 4.00%. Hammer projects cost-of-funds rose 10 bps to 2.30% for 2019.
The U.S. Top 4 Issuers (Chase [JPM], Capital One [COF], Bank of America [BAC], Citibank [C]) credit card yield rose 5 basis points (bps) sequentially at 12.29% and up 35 bps year-on-year (YOY) in 2019, compared to 11.94% 2018, according to CardWeb.