Why Are Credit Card Interest Rates Rising?

Written by , May 25, 2012

Why Are Credit Card Interest Rates RisingIt might not make sense to most of us. Even though interest rates on home mortgages have fallen to historic lows, and the interest rates we earn on our savings accounts and CDs are near 0%, interest rates on credit cards seem to be rising. Why exactly is this happening?

Not surprisingly, there are a number of different opinions, and doesn’t necessarily appear to be any single element that’s leading to the credit card rate increases. It’s probable that rising credit card rates are due to a number of different factors, although it’s difficult to know exactly how much each factor contributes to the increase.

Here are some of the possible causes on why credit card interest rates are rising.

  • Credit CARD Act. Some observers attribute the recent rise in credit card rates to the 2009 Credit CARD Act. The purpose of that law was to reduce or eliminate certain types of fees that credit card companies could charge its customers, and to increase customer transparency into the practices of the credit card companies. It’s possible that when the credit card companies became legally prohibited from charging certain types of fees to its customers, they looked to make up those fees elsewhere – primarily in the form of higher interest rates.
  • Increasing Delinquency Rates. Other observers believe that increases in credit card rates are simply due to an underlying increase in repayment delinquency. As more consumers default or become delinquent on their credit card obligations, the credit card companies cover these losses by increasing their interest rates.
  • Traditional Economic Forces. Some suggest that when you look at the state of the overall economy, and other traditional economic measures, credit card interest rates are actually not that high. Rather than comparing credit card interest rates to home mortgage rates and savings account rate, it would be fairer to compare them to historic credit card interest rates. By this measure, credit card rates are not actually as high as we might expect. Instead, it’s possible the market inefficiencies and government support for home mortgage rates has led to that measure being unreasonably low, which makes them an unreasonable comparison point.
  • Rates Aren’t Necessarily Rising For Every Customer. Finally, the statement that credit card rates are rising might not be entirely true. There’s some evidence to suggest that credit card rates for some customers are holding steady or actually falling. The fact that interest rates are rising for some customers may simply be an indication that the credit card companies are doing a better job at identifying the various levels of credit risk of its customers, and providing its “safer” customers with a lower interest rate.
  • Of course, the best possible solution for individual consumers is to work themselves into a position where the underlying interest rates on their credit card accounts simply don’t matter. Do everything you reasonably can to pay off your credit card balances each month and you won’t be affected by any increasing rates.

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