Average Credit Card Interest Rates in 2018
- August 21, 2018
- Posted by: Jeff Gitlen
- Category: Credit Cards
Are you wondering what a good interest rate on a credit card is? Then 2018 brings bad news, as the average credit card interest rates for a new credit card offer has risen to an all-time high of 15.59 percent. This increase in new credit card interest rates corresponds with an overall interest rate increase, due to a number of factors. Understanding how your credit card interest rate is determined can help you make smart decisions about using your card.
How Have Credit Card Interest Rates Changed?
Over the past year, credit card interest rates have risen as the central bank of the United States, the Federal Reserve (commonly called the Fed), raised its benchmark interest rate by 0.25 percent in December 2016. The Fed raised the interest rate by 0.25 percent again in March 2017, and is currently projected to increase the interest rate three more times in 2018. When the Fed increased the interest rate, this translated across the board to rising interest rates for other banks — including credit card companies.
Most credit cards have variable annual percentage rates, or APRs. When the Fed raised its interest rate, credit card companies increased their interest rates as well. This has resulted in higher interest rates for individuals with existing credit cards, and historically high initial interest rate offers for new credit cards.
Over the past five years, credit card interest rates have remained steady. In 2011, the average credit card interest rate was 13.04 percent. In 2016, that number had risen to just 13.56 percent. Adjusting for inflation, these numbers remain low, at 9.88 percent in 2011 and 12.30 percent in 2016, but less stable.
In the past decade, credit card interest rates have trended slightly downwards, from a high in 2006 of 14.73 percent to a low in 2013 of 12.95 percent. As the Fed began raising interest rates in late 2015, credit card interest rates began to rise as well, but rates remained low until 2017, when multiple interest rate hikes brought the average credit card interest rate up.
How Are Credit Card Interest Rates Determined?
When you apply for a credit card, it is important to understand how the issuer will determine what interest rate to charge you. In many cases, the advertised rate for a credit card will be a range, and the rate charged will depend on a number of factors, including the market interest rate, your creditworthiness, and the type of card. Knowing this can help you choose a card with the lowest possible interest rate, and make better financial choices to improve the likelihood of getting a credit card with a favorable interest rate.
Economy’s Market Interest Rates
Most banks peg their interest rates to a market interest rate, plus an additional charge. The market rates are typically set by the London Interbank Offered Rate, or LIBOR, or the Prime Rate. LIBOR is the rate at which banks can borrow money for different periods of time, and represents an average of the rates for the various time periods. The LIBOR rate changes daily. Banks will use this rate as a starting point to set credit card interest rates.
The Prime Rate is the interest rate that commercial banks charge their most credit-worthy customers. Like the LIBOR rate, it is a starting point for determining a credit card interest rate. Both the LIBOR rate and the Prime Rate are closely tied to the Federal interest rate, so when the Fed hikes interest rates, both the LIBOR and the Prime Rate will rise as well.
After establishing the base rate using either LIBOR or the Prime Rate, credit card companies will then add an extra percentage amount to the interest rate based on your creditworthiness. This will typically be based on your credit score, which is a number between 300 and 850 that tells a lender how much of a credit risk you are. The higher the score, the lower your interest rate will likely be.
If you have a low score, it means that you probably had missed payments, late payments, or gone into default on debt in the past. If your credit score is really low, you may be denied entirely. While companies may advertise credit card APRs in a certain range, the rate that you receive will depend in large part on your credit history.
Type of Credit Card
The type of credit card will also impact the interest rate charged. Credit cards issued by smaller institutions, such as credit unions, tend to have lower interest rates. Store credit cards often have substantially higher interest rates than other types of credit cards, including those issued by major banks. Secured credit cards typically have higher interest rates since these borrowers are viewed as high risk, but there are still some solid offers with a decently low credit card APR.
How Do Late Payments Impact the Interest Rate?
Making late payments on your bills can be incredibly damaging to your credit history — and if you are way overdue on your credit cards, it could result in your interest rate increasing.
Under the CARD Act of 2009, credit card companies are largely prohibited from raising the interest rate on existing balances. However, there is an exception to this rule: if you are more than 60 days late in paying your credit card bill, your credit card company can impose what is known as a penalty APR. This new interest rate could be as high as 29.99 percent, and it can be applied to both existing balances and new purchases. In 2014, the average credit card penalty APR was 28.45 percent. If you are assessed a penalty APR, you will be required to make 6 on-time payments in order to have your interest rate reduced.
If you are struggling to make the minimum payment on your credit card, the best course of action is to contact your bank as soon as possible. Being hit with a penalty APR can make it even more difficult to get back onto firm financial ground. Contacting your credit card company before you are 60 days overdue on a bill can potentially help you avoid a penalty APR and paying additional interest on your balance.