You can get home equity loans, home equity lines of credit and new car loans at record low interest rates. The same is true of mortgages. Today’s interest rate on a 30-year fixed mortgage is hovering around 4.6%, which is not at an historical low but is still low by historical standards. Yet, the APR on variable-rate credit cards has increased from 14.56% to 15.31%. So what’s the deal?
Credit card holders are not behaving badly
This is not due to the fact that credit cardholders are behaving badly, which would justify the higher APR’s. In fact, what’s true is the opposite. The percentage of credit card accounts that are at least 30 days past due is at almost a 23-year low. For that matter, the average unpaid credit card debt is now well below what it was in 2008.
The three reasons
- Blame the type of loan
- Blame legislation
- Blame yourself
Perhaps the number one reason why credit card interest rates remain high is because they are unsecured loans. In comparison, mortgages are secured by houses and car loans by automobiles. If the person with this type of loan fails to pay on it, the lender can always repossess the car or the house. But the credit card companies can’t do this. Charge-offs and defaults are typically higher on credit cards then with secured loans. This means the risk is higher for credit car companies than for a mortgage or auto lender and they charge interest accordingly.
Blame the legislation
Another major reason why credit card APRs are moving in an opposite direction from other types of loans is because of legislation passed in 2009 titled the Credit Card Accountability, Responsibility and Disclosure Act. When this law went into effect, credit card companies could no longer increase interest rates in the first year and couldn’t apply interest rates to new charges. Plus, the Act placed caps on penalty fees and certain other types of fees were either limited or eliminated, and restrictions were placed on payment and billing practices.
The department of unanticipated consequences
While this act had good intentions and did make some things better for credit card users, it had an unanticipated consequence. The credit card companies started raising interest rates and annual fees in order to recoup the income they had lost. As an example of this, in 2010 the average annual fee was $80 while last year it was $113. Since this legislation made credit cards less profitable for banks, they had to search for new ways to recover the lost income.
Maybe you should you blame yourself
While we consumers can’t have any effect on the APRs that the credit card companies assign to their cards, there is an area where we can make a difference. Many credit cards have interest rate ranges that go from low to high. And the interest rate you will be assigned will be on the high or low side mostly due to your credit score. In fact, you and one of your neighbors could have the same credit card but the two of you could have very different interest rates on it.
If you have a high FICO credit score – like above 720 – you should get an interest rate somewhere between 10% and 15%. On the other hand, if you have a credit score between 680 and 720 your APR will probably be between 15% and 20%. And if your credit score is between 620 and 680, you will likely be smacked with an interest rate in the 20s.
If you have a good payment track record on your credit card and feel that your APR is too high, call the company and ask to speak with a customer service representative. They often can reduce your interest rates by between 1% and 3%. In the event the representative refuses to help you, just tell him or her that you plan to transfer your balance to a new card that gave you an offer with a lower rate. If the credit card company still won’t budge, you’ll have to vote with your feet and actually activate that balance transfer.
If you’d like more information on getting your credit card interest rates reduced, watch the following video for some helpful tips.
The only time it matters
Of course, whether you have a high or low APR on a credit card makes a difference only if you are not paying off your balance every month. This makes credit cards different and in some ways better than an auto loan or mortgage. These types of loans have interest rates that you must pay every month. But if you do pay off the balance on a credit card at the end of the month, you will pay no interest at all.
Get your credit score
Whether or not you’re concerned about the interest rate you’re paying on a credit card, you should get your credit score at least twice a year. Virtually all lenders use your FICO score in determining your interest rates and many auto insurance companies now factor this in when calculating your premium. There is only one place you can get your true FICO score and that is at the website www.myfico.com. You could either pay $19.95 for it or get it free by signing up for a free trial of the company’s Score Watch program. You can also get your credit score free from one of the three credit-reporting bureaus – Experian, Equifax and TransUnion – or from sites such as CreditKarma.com. This will not be your FICO score but should be close enough that you will know where you stand in terms of your credit worthiness.