Interest Rates Are Falling -- But Your Credit-Card Rate Could Be Going Up
14 Octubre 2019 - 5:29PM
Noticias Dow Jones
By AnnaMaria Andriotis
Lenders are charging record-high margins on credit cards even as
borrowers take on more debt.
The increase in rates might seem counterintuitive given that the
Federal Reserve has twice lowered short-term interest rates in
recent months. But banks' generous card rewards programs, offering
free travel and other perks, have been eating into lenders'
profitability.
To offset that pain, banks are charging cardholders more to
borrow.
The average annual percentage rate, or APR, on interest-charging
credit cards is about 17%, according to Fed data. That is near its
highest in more than two decades.
Credit cards' APRs are based on a broader market rate plus a
margin set by the lenders, and lenders have been raising those
margins. They can charge higher rates to consumers who get new
cards, but in some cases they also can raise rates on existing
cardholders.
Lenders tacked on an average margin of 11.72 percentage points
on interest-charging cards in August, up from 10.6 points two years
before. It is the highest margin on record, according to an
analysis of Fed data by WalletHub.com, a consumer finance
website.
Interest rates on private-label credit cards, which can be used
only in certain stores, also are rising. The average APR on these
cards reached 27.5% this year, a record, according to
CreditCards.com.
Credit-card debt has surged in recent years. U.S. households
with card balances owed an average of $8,602 in the second quarter,
up 8% from the same period of 2015 when adjusted for inflation,
according to an analysis of Fed data by WalletHub.com.
Card issuers essentially recruit two types of consumers:
Affluent customers who spend a lot and pay their bills in full each
month, and those who make at least their minimum required payment
every month and carry balances. Higher rates are unlikely to affect
customers who pay their bills in full each month.
Big card issuers, including JPMorgan Chase & Co. and
American Express Co., in recent years rolled out large sign-up
bonuses and other incentives to attract these wealthier customers
to premium cards, by which points can be redeemed for airfare,
hotel stays and other perks. But the cards weren't the profit
bonanza that companies hoped for.
Many savvy consumers game the system, reaping rewards before
moving on to the next card.
Many of them also pay their bills in full and avoid interest
charges and late fees. Most banks have refrained from offering the
massive sign-up bonuses that were popular a few years ago and have
been scaling back other card features, but they also want to keep
their affluent rewards customers because the lenders hope to sell
them other bank products.
The extra charges paid by those who carry balances can help
offset the profit hit that card issuers incur from the rewards
programs. The interest charges borrowers rack up often wipe away
the financial benefits they would receive from rewards
programs.
Charging higher rates already has helped boost card divisions'
returns. Profitability had been declining for several years but
ticked up in 2018, when broader interest rates rose and banks also
raised their margins on credit-card rates.
Credit cards delivered a 3.8% return on assets to large banks
highly concentrated in the card business in 2018, according to the
latest data available from the Fed. That marked the first increase
in returns since 2013. That figure will likely rise to 3.9% this
year, according to a forecast by Brian Riley, director of credit
practice at Mercator Advisory Group, a payments consulting firm. He
also predicts that credit-card APRs will rise slightly over the
next two years.
Charging higher rates also is a way for lenders to protect
themselves against future loan losses. Rising charge-offs weighed
on profitability in 2016 and 2017, and several lenders responded by
tightening underwriting standards.
For lenders concerned that there will be a recession in the next
year or two, "a natural response is 'Let's build in more cushion to
those loans we're originating...things are getting a little bit
dicey,'" said Brian Foran, an analyst who covers banks and credit
cards at Autonomous Research.
Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com
(END) Dow Jones Newswires
October 14, 2019 18:14 ET (22:14 GMT)
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