Card Rates Rise While the Prime Rate Falls
Here is an interesting by-product of our current economic difficulties. The Prime Rate has been steadily going down due to the Federal Reserve’s efforts to stimulate the economy by cutting interest rates. It is currently at 4%. The Prime Rate is the interest that banks charge each other to borrow money.
Most all major credit markets and lenders take their cue from the Fed. When the Federal reserve lowers rates, banks, mortgage companies and credit card issuers and financial institutions follow suit. They do the same when the Prime Rate goes up. But now we seem to have a bit of a disconnect. This can no doubt be attributed to the rising number of defaults.
What we see happening here is credit card companies either holding rates steady, or raising them, in spite of the decreases in the Prime Rate. They are attempting to make up for some of their losses to defaults and consumer non-payment of debt by having the customers that do pay, pay a bit more.
That is a slippery slope however. What the credit card issuers, and other lenders for that matter, don’t want to do is raise interest rates to the point where they force even more defaults. When someone goes into default or declares bankruptcy then the lenders get nothing. It’s a tricky balancing act. It reminds me of the old saying, ‘Don’t cut off your nose to spite your face’.
In the final two weeks of October the average credit card interest rate went from 13.75% to 13.81%. Bear in mind that the credit card companies have the right to change their rates at any time. That is spelled out in the terms and conditions of the disclosure statement.
Please always remember to carefully read the terms before you complete a credit application. That goes for auto loans, mortgages, personal loans and business loans… not just credit cards.
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