A bite to the budget: Credit card rates are rising
http://www.mcall.com/business/local/all-cardsapr23,0,5979047,print.story?coll=all-businesslocal-hed
April 23, 2006
From The Morning Call
The cost of borrowing is rising faster than overall interest levies.
By Harriet Johnson Brackey
Special to The Morning Call
You probably didn't hear this from your credit card company, but the interest rates on credit cards are jumping. The increase is much steeper than the rise in mortgage rates or what banks pay on certificates of deposit.
Today's average annual interest rate on a no-frills credit card is 13.8 percent, up from 12.6 percent in January. That's from the Credit Card Monitor survey released Tuesday by IndexCreditCards.com.
Credit card debt is usually the most expensive kind of household debt, a fact that's especially tough for consumers when interest rates are heading up. ''Card rates are rising faster than the rise in general interest rates,'' said Justin McHenry, research director of the Cleveland-based survey firm.
The higher interest rates will add a few dollars to minimum monthly payments. But over time, that can add hundreds of dollars to consumers' debt loads. Interest rate hikes can actually sneak up on consumers. That's because most credit cards in use today carry variable rates, which card companies can change without notifying customers in advance.
Fixed-rate card issuers, which have to notify consumers in writing before rates change, have been busy converting their cards to variable rates. ''I would say there are very few fixed-rate cards left,'' said Curtis Arnold, founder of CardRatings.com, a Web site in which consumers post reviews of credit cards.
Rewards cards had the highest rate hikes of all in the IndexCreditCards.com survey.
Reward cards raised the average to 15.18 percent, up from 13.64 percent in January. One card, the Capital One No Hassle Cash Rewards Visa, had a rate as low as 9.9 percent in January but the card's current online rate offer is 14.15 percent.
Credit cards rate hikes are in response to a string of Federal Reserve Bank increases. But they have far outstripped other consumer interest rate increases. By comparison to the 1.2 percentage point hike in average credit card rates, mortgage rates have popped up 0.28 percentage points since the start of the year. The average is 6.49 percent for a 30-year fixed-rate loan, according to Freddie Mac.
Credit cards actually are in a game of catch-up to all those other consumer rates. The reason, says Greg McBride, senior financial analyst at Bankrate.com, a North Palm Beach research firm, is that issuers tend to change the rates they charge consumers only four times a year.
That left card issuers, in the final quarter of 2005, responding to two Fed rate hikes in November and December 2005. By the end of March this year, card companies were catching up to two more hikes, one in January and another at the end of March.
Altogether, those four rate hikes added one percentage point to the federal funds rate, which is the target interest rate the Fed sets for overnight loans among banks. What's happening to federal funds rates tend to set the direction for other forms of short-term borrowing. The prime rate, the rate banks charge their best customers for short-term loans, also has risen.
''We can thank our friends at the Fed because the interest rate increases they have made are pushing credit cards and other rates such as home equity lines of credit higher,'' McBride said.
Financial experts believe the Federal Reserve Bank might soon stop raising short-term rates. The Fed began pushing rates up two years ago. But any such move, if it happens, won't help credit card holders right away.
At an interest rate of 14 percent, a consumer who pays only the credit card minimum can stretch a $5,000 debt out over 25 years. That would cost the consumer $411 more than the same debt at 13 percent. That's according to a calculation from Bankrate of a monthly payment of 1 percent of the balance plus interest.
''In a rising interest rate environment, there's very little justification for holding on to credit card debt,'' McBride said. ''It should almost always be the primary focus of your debt reduction efforts.''
Harriet Johnson Brackey is a reporter for the South Florida Sun-Sentinel, a Tribune Publishing newspaper. The Associated Press contributed to this story.
