The interest rate applicable to credit card accounts is also referred to as the “annual percentage rate,” or APR. The interest rate applicable to most balances on a credit card, including the balance generated by purchases, is often referred to as the “retail” or “purchase” APR.
Historically speaking, credit card offers in 2017 were very generous. However, as the Prime Rate rises, the pinch on lenders will mean higher APRs and potentially less generous rewards for cardholders.
- Higher Interest Rates. For cardholders carrying balances, the impact of rising interest rates is felt immediately in the form of rising APRs. [For example, a credit card agreement may include a calculation like the following: The Purchase APR is determined by adding 14.98% to the Prime Rate.]
- Higher Minimum Balances Due. Additionally, as APRs increase, so do the accrued interest and fees, which will increase the minimum amount due each month. For example, many credit card agreements calculate the minimum amount due by adding 1% of the principal to any accrued interest and fees. Fortunately, for most cardholders, the increase will be negligible. [For example, an interest rate increase of 0.25% on a $1,000 balance would result in an extra $2.50 a year of credit card interest.]
- Shorter Introductory Rates on Balance Transfers. Over time, because credit card companies still bear interest costs during low or 0% interest introductory rates, generous introductory rate periods may be cut back. In order to mitigate its losses, as interest rates increase, it is likely that credit card companies could shorten the duration of low or 0% interest rate introductory offers.
- Rewards May Be Cut Back. Although credit card issuers make some money from the merchant fees paid on each transaction, when cardholders pay off their balances every month, these so-called transactors are not as profitable for the credit card issuers. According to a 2017 Consumer Financial Protection Bureau (CFPB) Consumer Credit Card Market Report, up to 40% of cardholders report paying their credit card bills in full each month As interest rates rise, these transactors become even less profitable for credit card issuers and, consequently, the credit card companies may eventually begin to reduce sign-up bonuses or rewards.
FREQUENCY WITH WHICH CONSUMERS REPORT PAYING THEIR
CREDIT CARD BILLS IN FULL (CFPB FINANCIAL WELL-BEING SURVEY)
Our Advice?
While the rewards being offered are still generous, now is a good time to research your options and take advantage of new credit card offers that meet your needs. Over time, as interest rates rise, these offers may be harder to find.
Chase Sapphire Preferred® Card
With a 60,000 point new cardmember bonus when you spend $4,000 in the first 3 months of having the card, plus 2x points on travel and at U.S. restaurants — all for a $95 annual fee — this card is one of the top rewards card values available. Chase points are transferable to 9 airlines and 4 hotels, giving you the option of booking directly via these loyalty programs for some massively lucrative award redemptions in first & business class or at 5-star luxury hotels & resorts.
