How High Can Credit Card Interest Rates Go?

According to Synovate the average interest rate for existing credit cards is now 14.7%.  That’s compared to 13.1%  from the end of 2009.  Point being, credit card interest rates are on the rise.  The question is why?  Why are interest rates on the rise and how high are they allowed to go?

The CARD Act is silent on the subject of capping interest rates, which is a bad idea anyway because it assumes that all consumer risk can be subsidized at no more than X% (yes, the X is intentional).  That’s an impossible way to run a business because some consumers simply deserve very high interest rates because they’ve proven that they have a hard time paying back their lenders.  But how high is too high?

As pointed out in this CNNMoney article First Premier Bank, at one time, had an interest rate of 79.9% and that still wasn’t high enough to stem defaults.  And while 79% sounds really high, because it is, it’s certainly not as high as you’ll pay with other types of lenders.  In fact, 79% is a downright bargain compared to some.

Take, for example, pawn lenders who will lend money short term at roughly 50% LTV.  Their rates vary by state but 30% for 90 days isn’t uncommon.  Annualized that’s at least 120%.  And take payday lenders who lend for only a few days.  If you annualized their rates we’re talking several hundred percent.  The same goes for title lenders who will lend against the title of your car at about 50% of the true value.

There are other credit card issuers who will gladly charge you rates well into the 20’s and 30’s.  And while this might sound unfair, it’s really not.  Nobody forces anyone to accept these terms.  Taking out a new card is a voluntary act.  The last time I checked First Premier Bank wasn’t sneaking into your house and slipping one of their cards in your wallet.

There is simply a segment of the population who wants a card so bad that they’re will to accept almost any terms.  And while us FICO 800’s might sit aside and throw insults at the companies who fulfill this demand, I think it’s important to look at what they do from a “glass half full” approach.  Using one of their cards for a few years could improve your credit enough to qualify for better deals from mainstream lenders.  You can’t get that benefit from pawn, title or payday lenders and you can’t get it from pre-paid debit cards either.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Categorised in: Credit Cards, Credit Score, Debt

This post was written by John Ulzheimer