Bank credit card rates will begin to trickle upward next month in the wake of the Federal Open Market Committee (FOMA) decision to raise short-term rates by 25 basis points (bps). It is likely credit card rates in the first quarter will return to 2010 levels.
The prime rate moved to 3.25% in 4Q/08 and has remained at 3.25% until 4Q/15.
In 2008 about 75% of U.S. bank credit cards carried variable interest rates pegged to the prime. Today, 90% of U.S. bank credit cards are variable prime-based, according to CardTrak.
According to Federal Reserve the average credit card rate for accounts assessed interest now stands at 13.93% in the fourth quarter.
Considering 90% of the increase in the prime rate or 23 bps will be reflected in the first quarter average credit card rates will likely hit 14.16%, the highest since 4Q/10.
With the likely prospect the FOMB will likely push rates up by 50 bps in 2016, average credit card rates could be pushed to 14.51%, the highest since 1Q/10, according to CardData.
Americans currently owe $925 billion in revolving credit, mostly credit card debt, and with 60% assessed interest or $555 billion, the increased debt service cost from the rate hike computes to $1.27 billion.
REVOLVING CREDIT CARD RATES
(rate for accounts assessed interest)
Source: Federal Reserve
Excerpt from FOMA statement:
The FOMA committee judges that there has been considerable improvement in labor market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 percent objective. Given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 1/4 to 1/2 percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
For data, background and forecasts on Consumer Credit Card Rates: Search CardWeb.com’s CardFlash® Library of more than 58,000 archived articles; Access CardWeb.com’s CardData® for current and historical Performance, Portfolios, Profiles, etc. Visit RAM Research® (ramresearch.com) for quarterly and annual forecasts covering more than 150 payments metrics. [complimentary or deeply discounted access to CardWeb.com subscribers].
Additional database resources include CardWeb.com’s CardExecs® – comings & goings of payments movers & shakers; CardWeb.com’s CardWatch® – ears & eyes on marketing globally (57K items); and CardWeb.com’s CardPixes® – form & function of card design (7K items).