Why Credit Card APR Rates Stayed High in the Recession

Written by Stephanie Halligan on October 9, 2013

APR rates

You may have just refinanced your mortgage and locked in a lower rate. You may have taken out a student loan with a really low interest rate from a private leder. And yet, your credit card APR is still sky high - and could end up climbing. With interest rates still hovering at historic lows everywhere else, why have credit card APR rates stayed so high during the recession?

At the beginning of the year, average credit card APR rates hovered just under 15 percent, and for many people with a less-than-desirable credit history, folks are seeing APR rates upwards of 25%.

Why so high when other interest rates are so low?

Many experts believe the Credit CARD Act of 2009 is to blame. Credit card companies are no longer able to hike interest rates without warning, so they now choose to front-load those APR rates when you first sign up for a credit card.

At the same time, more Americans are continuing to rely on their credit cards for borrowed funds in a slow economy. Since so many homeowners are underwater, equity lending is no longer an option and borrowing home equity for a line of credit has slowed down. Credit cards, on the other hand, are still very much in demand, giving financial institutions significant leverage to keep rates high.

Finally, even though credit card issuers have tightened up their lending requirements in recent years, credit cards are still considered a much riskier line of credit than others. Even though a person’s credit card limit is significantly lower than what one would borrow to buy a home, the method in which a consumer is approved for a credit card is considered more ambiguous and risky from the financial institution’s perspective. Credit card companies approve or deny credit cards based on credit history - this helps predicts your likelihood to pay back what you owe. But even though credit card companies have a good sense of your likelihood to pay back your balance, they still have to absorb the loss if you fail to repay. Without collateral (like a home) to use against credit card debt, credit cards continue to be classified as a risky line of credit for banks, meaning interest rates will continue to stay high.

Posted Under: Credit
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About Stephanie Halligan

Stephanie is the founder of The Empowered Dollar, a site dedicated to helping millennials to fix their finances and find their stride in money and life. When she's not blogging, Stephanie is designing school curricula and online games to teach students about smart money management.


Oct9

APR rates

You may have just refinanced your mortgage and locked in a lower rate. You may have taken out a student loan with a really low interest rate from a private leder. And yet, your credit card APR is still sky high - and could end up climbing. With interest rates still hovering at historic lows everywhere else, why have credit card APR rates stayed so high during the recession?

At the beginning of the year, average credit card APR rates hovered just under 15 percent, and for many people with a less-than-desirable credit history, folks are seeing APR rates upwards of 25%.

Why so high when other interest rates are so low?

Many experts believe the Credit CARD Act of 2009 is to blame. Credit card companies are no longer able to hike interest rates without warning, so they now choose to front-load those APR rates when you first sign up for a credit card.

At the same time, more Americans are continuing to rely on their credit cards for borrowed funds in a slow economy. Since so many homeowners are underwater, equity lending is no longer an option and borrowing home equity for a line of credit has slowed down. Credit cards, on the other hand, are still very much in demand, giving financial institutions significant leverage to keep rates high.

Finally, even though credit card issuers have tightened up their lending requirements in recent years, credit cards are still considered a much riskier line of credit than others. Even though a person’s credit card limit is significantly lower than what one would borrow to buy a home, the method in which a consumer is approved for a credit card is considered more ambiguous and risky from the financial institution’s perspective. Credit card companies approve or deny credit cards based on credit history - this helps predicts your likelihood to pay back what you owe. But even though credit card companies have a good sense of your likelihood to pay back your balance, they still have to absorb the loss if you fail to repay. Without collateral (like a home) to use against credit card debt, credit cards continue to be classified as a risky line of credit for banks, meaning interest rates will continue to stay high.

About Stephanie Halligan
Stephanie is the founder of The Empowered Dollar, a site dedicated to helping millennials to fix their finances and find their stride in money and life. When she's not blogging, Stephanie is designing school curricula and online games to teach students about smart money management.