Card Rates Rise with Perceived Risk

In response to heightened sensitivity to risk, credit card lenders have notably increased the prices they charge their borrowers.

Even as the prime rate dropped on Oct. 29 to 4% from 4.5%, the average credit card interest rate rose to 13.78% as of November 13, 2008; up from 13.75% on October 15. Increased credit card rates reflect fear of more credit card delinquencies.

Curtis Arnold, founder of CardRatings.com, says companies are hedging bets that the number of credit card defaults will increase in the first quarter of 2009.

“I think default rates will continue to rise next year, because average charge-off rates are at the historical high of 6% right now,” Arnold says.

He says charge-off rates typically fall between 3% and 4%.

Not surprisingly, demand for fixed-rate credit cards has increased as consumers look to lock in their rates at the current historic lows. Now, about 30% of consumers have fixed-rate card products, as opposed to 20% in November 2007.

“Consumers feel there is a sense of security associated with fixed rate credit cards right now, despite the fact that adjustable-rate card holders are enjoying the benefits of incredibly low rates,” says Arnold.

In charging more for card loans, lenders are also looking for a sense of security, albeit of a different variety.

“Credit card companies are putting more money aside because they are expecting more defaults and trying to increase their profitability,” Arnold says.