If there’s one thing this country’s gotten used to, it’s low interest rates.
Savings accounts pay virtually nothing. Mortgage rates are historically low. Heck, even auto financing is cheaper than it’s ever been.
You’d think the interest rate on your credit card would have followed suit.
In fact, credit card rates are lower than they have been. They’re just not low when compared with other interest rates.
According to the American Bankers Association, the average effective interest rate on all credit card accounts fell to 11.13% at the end of 2013. That’s down 16% from its peak at the beginning of 2010.
But that’s not nearly as steep a drop as on other forms of consumer loans. For example, the average new-car loan has dropped more than 27% over that same time period, according to the Federal Reserve.
There’s a big reason, of course, why rates on credit cards remain relatively high while other interest rates have fallen so sharply. Credit cards are unsecured debts, meaning there’s no collateral to back them up, so lenders have to charge more.
If you default on your auto loan, the lender can always repossess your car and get some or most of its money back. But if you can’t pay your credit card loan, there’s not a whole lot the bank can do except take you to court, in which case the lender will be lucky to recover pennies on the dollar.
And if you file for personal bankruptcy and discharge your debts, the bank is pretty much out of luck.
Easier to get credit
But while rates may not have come down as much as many borrowers would like, credit availability is getting better.
“The post-recession trend of constrained credit card credit availability is slowing down,” the ABA says. “Total credit lines increased 4.6% in 2013 — the first increase since the end of the recession.”
A big reason for the change is that consumers are in better financial shape than they were during and just after the recession. Delinquencies on credit cards declined significantly in the first quarter, the ABA says.
“Consumers have a greater capacity to meet their financial obligations due to an improving economy, low interest rates and the significant de-leveraging they’ve done in recent years,” says James Chessen, ABA’s chief economist. “A disciplined approach to managing debt has helped people improve their financial positions, keeping delinquencies near historical lows.”
Indeed, one of the main ways some consumers have been managing their debt is by avoiding getting into it at all. The ABA says an increasing number of credit card users are using their cards as a transactional tool — mainly to pay for things and earn rewards — rather than as a form of debt.
Yes, more consumers are using credit cards to pay for things, they’re just not carrying a balance. That’s always the wisest thing to do.
So by all means rack up the points on your credit card. Just make sure you pay your balance in full every month.
If you must carry a balance, try to transfer it to one of the many 0% offers that some banks are offering, some as long as 21 months.
These low-rate periods are temporary, and you’ll probably need good to excellent credit to qualify, but as the ABA report infers, more people will now likely make the grade.