Credit card rates have risen to a four-year high—this, at a time when the Fed is practically begging banks to lug away free money. Does that mean that card companies are making out like bandits? And where can card customers expect card rates go in 2012?
"Rates currently are the highest since we've been tracking them," says Ben Woolsey, director of marketing for CreditCards.com, which has tracked card rates every week for the past four years. The average rate nationally right now, based on new card offers by 100 of the most popular issuers in the U.S., stands at 15.14 percent, up from 14.75 percent six months ago.
The average includes several different kinds of cards (airline, cash-back, low-interest, student, and business, for example) but excludes ones with introductory "teaser" rates. For cards with variable rates, only the lowest is considered for the average. Thus, some consumers are paying far more than the average suggests. The current rate for card holders with bad credit, for example, is 25 percent.
While credit card rates remain high, most other interest rates have reached 50-year lows. The prime rate, which banks charge their best customers, stands at just 3.25 percent. The federal discount rate -- that's what it costs banks to borrow from the Federal Reserve -- is just .75 percent.
Woolsey says the 15.14 percent average credit card rate represents a rise of some 300 basis points, or 3 percentage points, from where the average was in 2009 (12.3 percent) when Congress, in an attempt to reign in "unfair or deceptive" practices, passed the Credit Card Accountability Responsibility and Disclosure (CARD) Act.
Some of that act's unintended consequences, he says, have arguably made life worse for consumers.
The CARD act restricts companies' ability to jack up rates on existing balances without first giving account holders proper notice; it forbids lenders from zinging customers with certain fees and penalties. It does not, however, address card interest rates per se. Prohibited now from raising rates on existing balances (except under certain circumstances), lenders are instead slapping higher rates on new accounts.
As for penalties, a survey by CreditCards.com finds that while 30 cards--including ones from Wells Fargo, U.S. Bank and HSBC--have done away with penalty rates, others have kept them and raised them. The average penalty rose from 27.9 percent in 2010 to 28.6 percent in 2011. Barclays, says the survey, charges the highest penalty rate: 30.24 percent.
Just because a lender lowers or dispenses with its penalty interest rate, however, doesn't mean its customers necessarily are better off: the lender still can charge a penalty fee, lower the account's credit limit or close the account altogether.
Does all this mean, then, that card companies are making juicy profits? Not necessarily, says professor Todd Zywicki of George Mason University. It's true that the Fed has lowered the rates it charges banks, but credit card rates are less closely tied to the cost of funds than are mortgages or car loans.
With car loans, he says, the underlying cost of funds represents perhaps 80 percent of a lender's expenses; with home loans, 90 percent. "For credit cards, it's more like 30 to 40 percent," he tells ABC News. Moreover, credit card accounts are expensive for banks to run, what with customer service costs and so many small transactions needing to be processed. Charge-offs and defaults are higher than for other kinds of loans.
What can card holders expect average rates to do for the rest of 2012? Come down, says Ben Woolsey. "I'd guess they will start to trend downward as the economy improves. By December, I'd expect to see them in the range of 13 to 14 percent. That's my gut feeling."
Consumers can fight back over high interest rates on their cards, though it may be more difficult for those with damaged credit or high balances. Bankrate.com has a free tool that lets you sort card offers by rate and perks. Many people have been able to negotiate lower rates with their existing cards simply by calling the customer service number.