Why U.S. Credit Card Rates Won't Be Reduced

Rising Default Rates Mean no Reduction in Borrowing Costs

Jun 13, 2009

Rising unemployment and card default rates mean that there is unlikely to be a reduction in the cost of borrowing. Are credit card rates more likely to actually increase?

Credit card rates have come under considerable scrutiny in recent months, yet a reluctance remains to implement any Congressional control on borrowing costs. Rising unemployment and charge-off rates mean that card provider profits have been seriously affected. Could rising default rates mean that the rate of APR on new balances are set to increase?

Providers Can Increase Credit Card Rates

Despite President Obama approving the Credit Card Accountability, Responsibility and Disclosure Act, there is nothing stating that card rates must be reduced. These upcoming changes mean that providers are highly likely to increase the rate of APR before the legislative changes come into force. Rising default rates amongst cardholders certainly increase the chances of a rise in borrowing costs.

Will Credit Card Rates Increase due to Rising Defaults?

The high charge-off rate means that providers will be desperate to recover any losses. The chance of a reduction in credit card rates appears highly unlikely. If Congress had felt that this was a realistic objective, they would have legislated to prevent borrowing costs rising further.

As Reuters reported on the 15 May 2009: "Lenders are trying to protect themselves by tightening credit limits, raising standards and closing accounts. They have also been slashing rewards, increasing credit card rates and boosting fees to cushion against further losses."

Credit Card Rates Cannot Be Increased on Existing Balances

From February 2010, it will become unlawful to increase credit card rates on existing balances. This rule applies unless it concerns an increase in the cards overall variable rate or happened as a result of a promotional rate coming to an end.

Credit Card Rates Can Be Increased with 45 Days' Notice

A provider can actually increase credit card rates on new balances provided that 45 days' notice is provided to cardholders. Escalating default rates due to rising unemployment mean that borrowing costs could rise in the near future, regardless of rate set by the Federal Reserve.

Whilst there has been a huge political focus on credit card rates and charges, it is unlikely that the cost of borrowing will be reduced. Soaring default rates due to unsustainable personal debt and rising unemployment mean that a provider will actually increase the rate of APR in an attempt to restore profitability.

Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.

The copyright of the article Why U.S. Credit Card Rates Won't Be Reduced in Personal Debt Management is owned by Asa Ghaffar. Permission to republish Why U.S. Credit Card Rates Won't Be Reduced in print or online must be granted by the author in writing.