Credit Cards Are Exception to Lower Consumer Rates

[alienlovechild 75]

There is one huge exception to the downward slide of interest rates on mortgages, autos and many other consumer loans. Credit-card rates are at a nine-year high—and are likely to head even higher.

The disconnect looks especially stark based on the gap between the prime rate and the average credit-card rate charged to Americans with cards in their wallets. The current difference of 11.4 percentage points is the largest in at least 22 years, according to research firm Synovate, a unit of Aegis Group PLC.

The unusual ascent by credit-card rates is fueled by a combination of forces. New limits on how quickly card issuers may increase rates under the Credit Card Accountability Responsibility and Disclosure Act of 2009, known as the Card Act, are triggering changes in how financial companies manage credit risk. At the same time, lenders are revamping some of their underwriting techniques.

Rising interest rates on many credit cards won't necessarily lead to more profits for issuers. "The interest-rate increases are designed to improve and protect profitability," says John Grund, a partner with First Annapolis Consulting Inc., but stubbornly high delinquencies and the Card Act's curbs will eat into those gains, at least in the short term.

Banks used to hike rates in a hurry on borrowers who fell behind on payments or otherwise turned out to be surprisingly risky. Under the Card Act, though, financial institutions must warn customers at least 45 days before making substantial changes to rates or fees. Consumers are also allowed to avoid future rate increases and pay off the outstanding balance over time under the original rate terms, so most changes affect only new credit-card purchases. New rules that took effect Sunday limit what banks can collect in penalty fees.

As a result, bank executives say they need to be smarter when setting the initial interest rates on credit cards. "We can't come up with penalty pricing or if we can, quite frankly, it's too late to do much good," says Stephanie Keire, head of consumer credit-card risk management at Wells Fargo & Co.

At Discover Financial Services, having less wiggle room to boost rates is causing the Riverwoods, Ill., company to offer fewer interest-free balance transfers aimed at new customers, says Discover President Roger Hochschild. Balance transfers have declined 60% from last year. Such offers typically include 0% interest on the transferred amount for a year.

In the second quarter, the average interest rate on existing cards reached 14.7%, up from 13.1% a year earlier, according to Synovate. That was the highest level since 2001. More increases are looming as card issuers respond to the new penalty-fee limits, says Ken Paterson, vice president of research at Mercator Advisory Group.

Bank of America now is more likely to offer customers with large deposits at the bank a lower rate, higher credit limit or better rewards than similar borrowers it knows less about.

Meanwhile, lenders are quicker to reduce credit lines at the first signs of financial stress, including late payments on other bills, a pay cut and unemployment. Three of the five largest U.S. banks have begun parsing employment and income data for changes that could affect the riskiness of existing customers, says John Cullerton, vice president at Equifax Inc. He wouldn't name the lenders.

Overall, card issuers are becoming more judicious about how much credit they hand out, in line with their push to keep nudging interest rates higher. The credit limit on new bank cards averaged $3,923 in May, the latest month for which data are available, according to Equifax. That is down 11% from an average of $4,422 a year earlier.

http://online.wsj.com/article/SB10001424052748704094704575443402132987676.html?mod=googlenews_wsj

[evli1966 88]

CC free here

OH YEAH!!!!

I use them and pay them off each week.

Got to rotate the cards so as to not accrue fees accidentally.

[rsn 135]

This isn't an issue as long as you can be responsible: pay off your bill in full every month, only charge something if you have cash in the bank to back it up, and stay organized. I make 2% off of all of my purchases & I pay no fees. If you're responsible & organized, credit cards are amazingly useful. I hate using cash - there's no benefit to doing so.

[spookyturtle 9,466]

This isn't an issue as long as you can be responsible: pay off your bill in full every month, only charge something if you have cash in the bank to back it up, and stay organized. I make 2% off of all of my purchases & I pay no fees. If you're responsible & organized, credit cards are amazingly useful. I hate using cash - there's no benefit to doing so.