(Editor's note: This is an updated version of an article that originally appeared in autumn 2002.)
NEW YORK (CNN/Money) -- You can't talk about interest rates anymore without using the phrase "record lows." But the same can't be said for credit card rates.
The Fed started its rate-slashing campaign in 2001, and by January 2002, the average interest rate on credit cards had fallen by more than 2 percentage points. But then they began a steady creep upward.
Today, the average credit card rate is 14.94 percent, according to credit-card tracker CardWeb.com. What gives?
Not much, apparently, when it comes to plastic. That's because credit card lenders have a lot of latitude in the rates they charge.
"The trend has been to raise rates because of the increasing number of defaults among consumers," said CardWeb CEO Robert McKinley. Defaults include personal bankruptcy, late payments, and going over your credit limit. As a result, punitive interest rates (up to 30 percent) have been assessed on more accounts.
How a Fed cut may influence your rate
Still, the Fed has some effect on credit card rates.
| RELATED TOOLS & SITES
|
|
|
|
|
The two types of cards -- variable-rate and fixed-rate -- are both affected by movements in the prime rate, which is the interest banks offer their most creditworthy customers. The prime rate, in turn, is highly sensitive to the Fed's rate moves.
Variable-rate cards, which currently account for about 55 percent of the market, are officially tied to the prime. As the prime rate floats, so does the card's rate -- automatically. But it's up to individual lenders to determine just how much above prime they set their rates.
Fixed-rate cards, meanwhile, are something of a misnomer, since their rates aren't actually fixed. They can -- and do -- fluctuate. Just when and by how much is entirely up to the lender.
It's a good bet rates will rise if the prime rate increases, since the lender's cost of doing business will be higher. Or they may change if the lender sells its portfolio of customers to another bank. And sometimes a fixed rate may increase for select customers whose credit has worsened.
If the Fed does cut rates again Wednesday, it's highly unlikely your credit card company will do so, too. That's because lenders often set a floor on rates, McKinley said. At this point, he noted, "nearly all credit cards with floor rates have already been triggered." Translation: Card rates are as low as they're going to go.
Even if they aren't, he added, it's unlikely the rate cut would have much effect on your credit card until January, which is when issuers usually adjust their pricing. "So it's possible that any rate cut today could be offset by a bump-up in pricing," McKinley said.
How to lower your costs
The average credit card balance per household with at least one credit card has risen to $8,900, according to CardWeb.
So if you're carrying an $8,900 balance at 14.94 percent you'll be paying off your cards for nearly 30 years and forking over $12,901 in interest if you pay just the minimum every month. If you manage to pay a fixed $350 every month, you can rid yourself of debt in two years and seven months, paying $1,707 in interest.
But you might pay less if you take advantage of low-rate offers. If your credit is solid, chances are you'll receive offers for cards with zero-percent interest for limited periods up to a year. "That's where the consumer can take advantage of the low interest-rate environment," McKinley said.
Still, read the fine print. Sometimes the zero-percent rate only applies to new purchases, not the balance you transfer. Or it may only apply to cash advances. There may also be balance-transfer fees. And the last thing you want to do is pick a card that offers a low rate for a very short period, after which the rate skyrockets. That's only a good option if you can pay off your balance before the low rate expires.
If you're a customer in good standing, sometimes getting a better rate just involves one phone call. In a survey conducted by the Public Interest Research Group (PIRG), 56 percent of those surveyed got their credit card rates lowered simply by asking their lenders to do so.
Keep in mind, a card with a low rate is not likely to include perks such as frequent flier miles. "There are sort of givebacks with those low rates," McKinley said. Plus, if you see a startlingly low rate, such as 5 percent, there may be a high annual fee or other cost involved.
The best way to curb credit card costs, of course, is to pay on time every month. Late fees have been going up and the time you have to pay your bill before a late-fee is assessed has been getting shorter. To avoid a late fee, either mail your payment in with at least five business days to spare or mail in the minimum due as soon as your bill comes and then send the rest later.
(For help figuring out the most cost-efficient way to reduce your credit card debt, try our Debt Reduction Planner.)
|
