The American economy is all topsy-turvy right now. Just this week, the Federal Reserve announced that it will keep long-term interest rates at a record low. Short term rates are already at record lows and they will continue to stay that way until the middle of 2013. That is, if the Fed has their way.
Contrary to popular belief, this sounds like great news for the average consumer, but a report from Credit-Land.com shows that APRs, which are linked to the prime rate, have been increasing rather than decreasing.
In fact, APRs are at the highest that they have been since 2007. The average APR is currently 14.96 percent. But, many cardholders often pay more than the average APR because of their credit scores. Consumers with lower credit scores are subject to higher APRs and vice versa for consumers with high credit score who are subject to lower APRs. Many of the advertisements for credit cards use the lowest possible APR in order to attract consumers. In fact, a consumer with traditionally bad credit will more than likely pay an APR of up to 24.96 percent.
A portion of the rate increase can be indirectly blamed on the Credit CARD Act of 2009 which shook up the credit card industry as we know it. Credit card issuers began charging higher APRs from bad credit consumers because the CARD Act denied them the ability to spike interest rates whenever they feel like it. Instead, banks began to increase fees and rates in strategic methods.
The Act also made the industry clarify their language in credit card applications and altered interchange fees. The CARD Act was a big blow to the revenue of major banks, and they have begun implementing creative ways to get money out of the consumer, such as clever marketing and misleading APR advertisements.
Now the only reason that credit card issuers can raise an APR on an existing account balance is if that account meets some very specific guidelines. “It’s hard to raise APR rates for one specific consumer without upping the rates for every consumer,” said Arnold Taubman, chief economist at Credit-Land.com. “This means that even people who pay off their balances religiously may be subject to rate hikes.”
The good news, though, is that because of the CARD Act, banks have to let you know upfront what the rate will be.
The news from the Fed doesn’t help credit card consumers as much as credit card consumers would like. This is because mortgages and car loans are more closely tied to the cost of treasury funds. With a mortgage, the “underlying cost of funds” is approximately 90 percent of the mortgage cost.
Car loans sit at about 80 percent and credit cards are only at 30 to 40 percent.