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Why Credit Card Rates Remain So High

Interest rates have been driven down on everything from bank accounts to mortgages. But new data shows borrowers still pay double-digit rates on one consumer staple — credit cards.

The average interest rate credit card holders paid during the fourth quarter 2011 was 12.78%, according to Federal Reserve data released today. That’s down from 13.08% during the previous quarter and 13.67% a year prior. Despite the declines, the latest data underscores that credit cards remain one of the most expensive forms of financing. By comparison, the average rate on new car loans is about 5% while 30-year mortgages are down to about 4.2%.

Banks say consumers will continue to see higher interest rates on credit cards than on other loans because they are riskier products. “The lender has to be compensated for the risk they’re assuming,” says Keith Leggett, vice president and senior economist at the American Bankers Association. Car loans and mortgages are considered less risky because they’re tied to actual collateral, he says.

Credit card rates are determined by several factors. They’re pegged to the prime rate, which has been 3.25% since 2009. Then card issuers tack on a margin, which was 9.53 percentage points in November, according to the latest data available, down from 10.42 in November 2010 and 11.12 in 2009. Issuers determine the margin based on the economy: High unemployment rates and bleak financial outlooks typically result in a higher margin as the lender prices in the likelihood of borrowers losing their jobs and missing card payments, says Odysseas Papadimitriou, chief executive at CardHub.com. (By comparison, in May 2000, the average margin hit a 20-year low of 5.52 percentage points; the unemployment rate that month was 4.0%.)

Also impacting their rates is that unlike other loans, credit cards aren’t necessarily paid down over time, says Dennis Moroney, research director of bank cards at TowerGroup. Instead, they’re moving targets allowing for debt to rise or drop at the borrower’s discretion.

Of course, a borrower’s profile also determines the rate he or she pays. Borrowers with high credit scores – typically above 720 — and with low debt-to-income ratios have the best shot at landing the lowest rates, says Papadimitriou. For those borrowers, some cards stand out among the competition. The First Command Bank Platinum Visa, the First Federal Bank, and the IberiaBank Visa Classic credit cards have interest rates of 6.25%, 7.15% and 7.25%, respectively.

Borrowers paying high interest rates on a credit card balance might want to consider transferring that amount to a new credit card. Many cards are touting 0% promotional rates on balance transfers that last nearly 10 months on average, based on fourth quarter 2011 data from CardHub.com, up from nearly 7.5 months a year prior.

Experts say the best way to save money on credit cards is to pay the balance off in full each month. Or in the case of 0% promotional periods, to pay the balance off in full before that term ends. That way, regardless of the card’s interest rate, the borrower doesn’t incur that charge.

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    • By WebOsPublisher

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    • By WebOsPublisher

      With the release of every new Humble Indie Bundle comes an influx of additional applications to my desktop.

      But as these don’t match the Faenza icon theme the OCD-esque desire for desktop consistency prevents me from adding shortcuts to many of these games to the Unity Launcher.

      But that’s where the ‘Humble Faenza Bundle’ – a set of Faenza-style icons for Humble-Bundeled games – comes in.
      Faenza Icons for Humble Indie Bundle Games | OMG! Ubuntu!
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      Faenza Icons for Humble Indie Bundle Games
      By Joey-Elijah Sneddon, posted December 15, 2011
      Share:
      With the release of every new Humble Indie Bundle comes an influx of additional applications to my desktop.
      But as these don’t match the Faenza icon theme the OCD-esque desire for desktop consistency prevents me from adding shortcuts to many of these games to the Unity Launcher.
      But that’s where the ‘Humble Faenza Bundle’ – a set of Faenza-style icons for Humble-Bundeled games – comes in.
      Although not every game released as part of the Humble Bundle series is present, most notably theВ most recently released Humble Bundle, there are more than enough icons provided – including tiles for World of Goo, Cogs, Osmos, and Defcon.
      Faenza Humble Bundle Icons |В tiheum.deviantart.com
      faenzahumbleindieicons
      Related PostsFaenza Icon Set Updates, Adds New App IconsFaenza Icon Theme Updated, Adds Handful of New IconsFaenza 1.1 Adds Ubuntu 11.10 Support, New Icons
      /* */
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    • Consider this article with todays WSJ letters to the editor on the Fed induced terrible fate of risk adverse savers: negative real interest rates. Ouch! Yet credit card issuers have created a huge spread between ultra low fed rates and very high credit card rates. P2P lending is one solution for both borrower and lender, by splitting the difference of those high spreads. I invest about 7% of my portfolio in P2P lending. Its no guarantee, but I refuse the guaranteed loss caused by the Feds negative real interest rates on conventional savings.

    • The rule these days seems to be that rates paid by normal consumers are rising, while the rates that they can earn with their savings are falling.

      Barring investments that look risky and unproven to me, like person-to-person lending, the industry seems to be skimming off all the profits to insiders.

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