9/25/2013 4:00 PM ET|
Why credit card rates didn't fall along with mortgage rates
To put it simply, credit card lenders have much more to lose when borrowers default on debt.
Since the financial crisis of 2008, interest rates have fallen sharply for all kinds of financial products: mortgages, savings accounts and corporate bonds, just to name a few. Yet as the Federal Reserve has held rates at unprecedented low levels, one type of loan rate has been seemingly impervious to change: Credit cards.
"The rates on credit cards remain stubbornly high because they should be higher," said Daniel Ray, editor-in-chief of CreditCards.com. "They'll never fall to the levels that mortgage rates enjoy, and they shouldn't."
At the same time mortgages were hovering in the mid 4% range, credit cards interest rates were averaging close to 15%. It might not seem like it makes much sense for the rate on one type of loan to plunge while the other doesn't, but credit card experts explain there are quite a few reasons, starting with the most fundamental.
A mortgage -- and a car loan -- are secured by property. Fail to make your payments and the lender can repossess the home or car and sell it to recoup some, or all, of its losses. Fail to pay your credit card and the bank can put you in collection, but taking back its card isn't going to pay their bills. That means the lender is taking on a much greater risk, particularly when you consider that some credit card limits can be more than what many people pay for their cars.
"Lenders always feel more comfortable with secured loans, but the recession helped boost the spread," Ray said. "Today's mortgages are, on average, about 10 percentage points less expensive than the average credit card loan, and even with recent increases in mortgage rates, that 'spread' is still near a record size. One big reason is that the Federal Reserve stepped in after the recession to prop up the home-lending industry. It offered no such rate-tamping help to the credit card industry."
It is possible to find a lower interest rate credit card if you're among those who have the best credit scores. But, for the most part, they'll be nothing like the rates people get for their mortgages or car loans.
The credit card industry also has to factor in a considerable amount of fraud it must contend with and balancing its losses by taking on a broad spectrum of consumers against the rates it charges to its best customers. In addition, consumer protections put in place by the Credit Card Act of 2009, which took away some of the freedom card issuers had to assess fees, forced an increase in interest rates immediately before the law took effect.
While higher rates are with us those reasons, you'll still see plenty of teaser rates of 0% -- of course you can't get lower than that -- but they are introductory offers that typically expire in 6-18 months and then convert to something typically north of 10%.
"The lowest rate I've seen on a card --other than the promotional rates of 0% -- is 5% on the Speedway SuperAmerica Credit Card," said Bill Hardepkopf, CEO of LowCards.com.
But, for the most part, cards considered low interest hover in the 10%-12% range. A few dip below, such as the Barclaycard Ring Mastercard, which has been offering an 8% rate, according to LowCards.com.
The credit card business is highly competitive, Hardekopf said, allowing consumers -- particularly those with the best credit -- to shop around to find a combination of features that suit them best. That could include a low interest rate, rewards or other perks.
Just don't expect your credit card rate and mortgage rate to match.
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There are only 3 reasons credit card companies have high interest rates.
1. They issue cards to people who shouldn't have them.
2. Theft by criminals.
3. Excessive profits they want to fatten the CEOs' and other executives pockets.
All of my cards have variable interest rates. I have no idea what they are, nor do I care. The balance is paid in full before it's due, so it's like they all are 0% to me.
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