As the Fed gradually raises rates, with today's APRs, will card issuers lower their prime rate index

[galahad15]

As the Fed gradually raises rates over the next several years, and taking into account today's commonplace high double-digit APRs, do you think that some of the card issuers may be willing to potentially lower their index value that is added the prime rate to generate the variable interest rates for their cards?  Or do you think the issuers are unlikely to budge on this and that interest rates on many variable-rate cards will be headed somewhere close to 30% from 2019 - 2022?

[longtimelurker]

---

@galahad15 wrote:

As the Fed gradually raises rates over the next several years, and taking into account today's commonplace high double-digit APRs, do you think that some of the card issuers may be willing to potentially lower their index value that is added the prime rate to generate the variable interest rates for their cards?  Or do you think the issuers are unlikely to budge on this and that interest rates on many variable-rate cards will be headed somewhere close to 30% from 2019 - 2022?

---

My first guess is that issuers will claim that the existing margin is needed (along the lines as as prime goes up so do their costs as they pay higher rates to borrow money) so rates will continue to rise.  That might suggest that an issuer might attempt to gain market share by shrinking the margin, but I don't know how much that really matters to the average person selecting a credit card  (as compared to you, where interest rate is THE most important thing!)

[FinStar]

It is highly doubtful that banks, especially the top 10 CC issuers, would even entertain the idea. Cyclical in nature, the markets will dictate the next set of events.

It's no surprise that most major CC lenders tend to have a pretty wide margin (or profitability spread) for a variety of their products and none seem to be adjusting it in the opposite direction or shorten such spread values.

[Anonymous]

Going back to the 1970's and 1980's the common interest rates ran 15.9% to the mid 20's% with many charging AFs of $15 to $39 for a plain credit card no benefits. Credit limits were $300 to $5K with often only those who earned $35K to $50K+ being even considered for Gold status. Also, income/employment was verified (phone or paper to employer for verification) no honor system. Why the high rates "just because" people did not expect otherwise. How did I know? Lived the era and worked the paper manual system to get credit limit increases with every thing manual and taking thirty days for approvals ... slow was the process.

[galahad15]

Thanks to everyone who replied for their valuable feedback and input.  Admittedly, I realize I may not be seeing the fuller or bigger picture on card interest rates historically over time, just because when I was in the process of getting my first bunch of credit cards in the late-90s and early-2000s, many go-to interest rates may have already been at historical lows or near-lows.  For example, I remember a lot of card issuers circa 1998-1999 offering rates like around 9.99% or in that general ballpark, some fixed-APRs.  Then into the early-2000s, up until about 2004 IIRC, you had some issuers who went exceptionally low (one memorable example that I seem to recall is Cap1 offering a fixed-rate card of 4.99%; I also had a Chase Platinum MC around that time frame with a go-to APR of 6.15% V or thereabouts).  So my overall experiences with credit card APRs may be colored by the times I first acquired them during.  Of course, even during those times you had lenders with much higher rates, but still it was not that hard to get a low-APR card from the banks around say about 1998-2004, or possibly even a few years beyond that.

I also recall during that same time period, at least some people had success having their card index that was tied to the prime rate being lowered on an individual basis -- for example, if a card-carrying customer were to call their lender, with a request to lower their go-to rate.  For example, I can recall when I had called in and the lender would be willing to reduce my APR from say Prime+8.99% to maybe something like Prime+5.99% or Prime+3.99%...

[Meanmchine]

Where have you gone Janet Yellen

[Brian_Earl_Spilner]

Just read an interesting article about credit cards and rising APRs. It stated that the rising rates are making it almost impossible for the average American to pay down their debt, and in turn has caused credit cards to be the only credit sector where defaults are on the rise. Every other sector such as auto, mortgage and personal finance are showing decreases in defaukts. Wish I could find the link.

[Anonymous]

---

@galahad15 wrote:

As the Fed gradually raises rates over the next several years, and taking into account today's commonplace high double-digit APRs, do you think that some of the card issuers may be willing to potentially lower their index value that is added the prime rate to generate the variable interest rates for their cards?  Or do you think the issuers are unlikely to budge on this and that interest rates on many variable-rate cards will be headed somewhere close to 30% from 2019 - 2022?

---

NFCU has already adjusted their rates lower late last year....when I opened my Cash Reward the rate was 9.99% variable (Prime Rate 3.50% + 6.49%); the Prime Rate has risen 5 times since I opened that account; therefore, my rate should be 11.24 % but it is "only" 11.15%. I can't remember exactly when they did it; but nRewards, Cash Rewards, Flagship and Go Rewards all got a minor rate reduction and, of course, Platinum got a huge reduction. Meanwhile Chase sent me a nastygram in the mail a few months ago raising my rates from 12.9% and 13.9%, respectfully, to 16.49%. I hope Chase does mess up the UR program so people stop putting them on a pedestal. Rant over. 

In addition, on my last Citibank Dividend statement, they mentioned that they lowered my APR to 14.99% (eye roll). It had been 15.24%. Not sure what caused the reduction; I was not on performance pricing so it was not part of rate re-evaluations. 

As far as what the future brings I could see banks offering slightly lower rates on new accounts while not touching pricing on existing accounts (this was common in the early 2000s). They may entertain a rate reduction on a per basis (much like Citibank does). Meanwhile the next recession is just around the corner (I am not an economist just saying the economy will eventually go back down) and this will likely lead to a reduction in Prime Rate and lower rates will follow. 

Americans have gotten very used to cheap credit for a decade now, that really won't last. 

[pipeguy]

Actually, due to last recession, the fed ignored historically established fed interest rates and artificially maintained low "next to zero" fed rates to stimulate the economy. The current fed is raising rates both to catch up to where rates should be and to dampen inflation. A true economic discussion is too long (and probably boring) for this post but the artificial manipulation of interest rates always has unintended consequences.

During the late 1970's and into early the next decade inflation was 18% per year and the prime rate peaked at 21.5% in late 1979 - the so-called purpose was to "regulate" the economy which obviously didn't work because the greatest part of the economy is consumer spending and the web of supply chains that produce and profit and provide employment for the production of consumer products, from cars to housing to candy bars. When it cost more to produce products (again everything from houses to vehicles to food) the retail cost goes up which typically results in fewer products sold.

Image the cost of manufacturing products going up 18% a year (inflation) and both consumers and businesses borrowing at a minimum of 21.5% (prime rate). Note that at the time credit cards were typically capped at 18% apr which changed a few years later, but that is another story. The "proper" use of the fed rate is to strike a balance between keeping inflation in check and keeping interest rates at a level that does not help or hurt the consumer market (buying or borrowing) so a generally light touch over time is preferred. 

Currently, we are seeing a step by step increase to keep inflation in check due to unemployment being low and the overall economy fairly strong but at a certain point, continual rate increases will depress the consumer market as that "cost" is passed on to consumers such as credit card holders that carry a balance. While lower borrowing interest rates are great for the borrower, the alternative issue is that savings rates are almost worthless at next to nothing. 

To answer the OP's original question, IMO generally lenders will maintain their margins of prime + X percentage until they start losing market share and then the smart one will cut back on their margins to increase their (lost?) market share (think how credit unions typically undercut major bank lenders now). Of course, lenders will continue to price in their risk based on credit scoring and income justifying ability to pay. 

Personally, I lived through what happened in the late 1970's and purchased my first home in 1979 with a great mortgage rate of only 10% (other neighbors were paying 14 to 16%) and of course I lived through the last 12 years where interest rates were basically nothing - neither option is especially attractive. 

Note that of course there are additional factors in play such as breaking down a manufacturers cost of doing business (raw materials, employees, benefits, taxes, mandated regulations, etc) and profit margins which can and does affect "stock prices" on publically traded companies. My post was meant to be simple and avoid discussing anything or any issue that could degrade into "politics". 

[Anonymous]

pipeguy the prime rate was out of control back in the 1970's (my view only) and the consumers still took mortgages at 17.75% (unreal). Houses in my area of the country were hot and obtaining huge appreciation gains "flip this old house" was in play. Nothing to sell a house for a 35% to 50% appreciation increase (did it more than once - easy money if you could stand moving and the mortgage loan rat race). As to the 18% some states capped it using their usury rates (Minnesota is still capped). Note, the way around is to move to South Dakota and sell back across state lines and get a much higher rate or locate an office in Delaware (always thought Delaware would sink into the ocean back when that was the state for banks to be in) and claim that was headquarters. There was certainly bantering about who had jurisdiction between the feds and state levels on this (Citi Bank broke loose from all this around 1979 when they located the bank headquarters in Sioux Falls, SD and started offering checking accounts across state lines - got one). In the meantime savings account were earning 5.25% for CUs and 5.00% for regular state and national charted banks. A reminder on CUs is their federal tax breaks that allow them to share better rates with customers with the caveat that they have defined memberships. As this thread has mentioned we get low consumer interest rates and virtually nothing for savings and related. Trade offs. As to a discussion on Economics ... yeah, that could lead to politics. For those who wonder about US Bank who claims Minnesota as their corporate headquarters, you will find that their credit cards use North Dakota and their Elan Cards use North Dakota so they are not under the Minnesota usury cap of 18%.