Credit card APRs compared to Prime Rate

[Gollum]

Almost all credit card interest rates are tied to the Prime Rate, which has been 3.25% since December 16, 2008:

http://research.stlouisfed.org/fred2/data/PRIME.txt

The average credit card interest rate is currently 15% (dunno which domains are allowed for this forum, so google it for yourself).  That's Prime Rate plus 11.75%.

In the late 1990s and early 2000s, the Prime Rate reached a maximum of 9.25%.  My credit card interest rate during that period was 5.9%.  That's Prime Rate minus 3.35% at worst.

The current discrepancy between the Prime Rate (3.25%) and the average credit card interest rate is remarkable.  I doubt credit cards have ever had a higher average iinterest rate compared to the Prime Rate than the current situation.

Since many banks are effectively betting against consumers (by offering high APR reward cards), I suggest consumers err on the side of caution:

Go for a lower APR instead of rewards.

Let's look at a hypothetical example:

John Smith has an annual income of $36,000.

He is able to route all of his spending through his high APR rewards card.

He "earns" an average of 1.5% of his income from his card rewards, so he "earns" $45 per month in rewards:

$36,000 divided by 12 months equals $3000 per month

$3000 multiplied by 0.015 equals $45.

So John Smith "earns" $45 per month as long as he pays his credit card balance in full every month.

Now imagine this unfortunate change of circumstances:

John Smith is laid off from his job, so he has to carry a balance on his high APR (22.9%) rewards card.

Carrying a balance of $2000 costs at least $38.17 in interest each month:

$2000 multiplied by 0.229 equals $458

$458 divided by 12 months equals $38.17.

I think high APR rewards cards are betting against the average consumer.  We all plan to pay in full every month, but what happens if we are not able to do so?

[Repo-ed]

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@Gollum wrote:

Almost all credit card interest rates are tied to the Prime Rate, which has been 3.25% since December 16, 2008:

http://research.stlouisfed.org/fred2/data/PRIME.txt

The average credit card interest rate is currently 15% (dunno which domains are allowed for this forum, so google it for yourself).  That's Prime Rate plus 11.75%.

In the late 1990s and early 2000s, the Prime Rate reached a maximum of 9.25%.  My credit card interest rate during that period was 5.9%.  That's Prime Rate minus 3.35% at worst.

The current discrepancy between the Prime Rate (3.25%) and the average credit card interest rate is remarkable.  I doubt credit cards have ever had a higher average iinterest rate compared to the Prime Rate than the current situation.

Since many banks are effectively betting against consumers (by offering high APR reward cards), I suggest consumers err on the side of caution:

Go for a lower APR instead of rewards.

Let's look at a hypothetical example:

John Smith has an annual income of $36,000.

He is able to route all of his spending through his high APR rewards card.

He "earns" an average of 1.5% of his income from his card rewards, so he "earns" $45 per month in rewards:

$36,000 divided by 12 months equals $3000 per month

$3000 multiplied by 0.015 equals $45.

So John Smith "earns" $45 per month as long as he pays his credit card balance in full every month.

Now imagine this unfortunate change of circumstances:

John Smith is laid off from his job, so he has to carry a balance on his high APR (22.9%) rewards card.

Carrying a balance of $2000 costs at least $38.17 in interest each month:

$2000 multiplied by 0.229 equals $458

$458 divided by 12 months equals $38.17.

I think high APR rewards cards are betting against the average consumer.  We all plan to pay in full every month, but what happens if we are not able to do so?

---

They ALWAYS bet against the consumer. Remember the toxic housing debt that made some wallstreet and politicians billions about 3 years ago or so?

[afbar1114]

this is what i am starting to figure out now.... is it better to have a lower APR card then rewards? or use a rewards card insted of debit card like an AMEX charge card... esstientails like food and maybe gas should be PIF each month i beleve...so maybe thats where a rewards would come in..but other purchases should be put on a lower APR card..i just got the best APR i ever got at 14.24%

[Repo-ed]

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@afbar1114 wrote:

this is what i am starting to figure out now.... is it better to have a lower APR card then rewards? or use a rewards card insted of debit card like an AMEX charge card... esstientails like food and maybe gas should be PIF each month i beleve...so maybe thats where a rewards would come in..but other purchases should be put on a lower APR card..i just got the best APR i ever got at 14.24%

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Anything that has diminishing value immediately after purchasing it should be PIF each month.

[Gollum]

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@afbar1114 wrote:

this is what i am starting to figure out now.... is it better to have a lower APR card then rewards? or use a rewards card insted of debit card like an AMEX charge card... esstientails like food and maybe gas should be PIF each month i beleve...so maybe thats where a rewards would come in..but other purchases should be put on a lower APR card..i just got the best APR i ever got at 14.24%

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I think it is best to have no debt.

[navigatethis12]

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Gollum wrote::

John Smith has an annual income of $36,000.

$36,000 divided by 12 months equals $3000 per month

$3000 multiplied by 0.015 equals $45.

 John Smith is laid off from his job, so he has to carry a balance on his high APR (22.9%) rewards card.

Carrying a balance of $2000 costs at least $38.17 in interest each month:

I think high APR rewards cards are betting against the average consumer.  We all plan to pay in full every month, but what happens if we are not able to do so?

---

If he spends all of the money he earns every month then he needs to take a look at his spending habits. A person who makes 36 a year and loses their job should have no problem paying down a $2000 balance. I think that is where a lot of people go wrong, not putting money away and just spending it all. Not all rewards cards are that high. The Chase Freedom can be as low as 9.99 percent. That is without a sign up bonus though. The PNC card I have and the Fidelity two percent card are both 13.99.

Anyway, personally I would rather have rewards. If I replaced all the cards I have with cards that have a 5 percent rate, and never needed that rate, then I would be missing out on a lot of cashback. I suppose if one really wants a low rate card they could try and find one that can give a high limit and keep that for an emergency. However, I think one should always have some money put away. That way, if you lose your job you have no worries. If an unexpected bill comes up you would also have no worries.

I am disciplined enough that I never spend more than I have in my checking accounts. I do not spend that much anyway so that really is not hard for me.

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@afbar1114 wrote:

this is what i am starting to figure out now.... is it better to have a lower APR card then rewards? or use a rewards card insted of debit card like an AMEX charge card... esstientails like food and maybe gas should be PIF each month i beleve...so maybe thats where a rewards would come in..but other purchases should be put on a lower APR card..i just got the best APR i ever got at 14.24%

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If you do do that you are still negating any rewards you gain. If you earn $15 in rewards one month and put $1000 on the 14.24 card and pay it off in 3 months, you will pay $35.00. Even one month is $12, which almost takes away the rewards from the one month.

[jefftca925]

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@Repo-ed wrote:

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@afbar1114 wrote:

this is what i am starting to figure out now.... is it better to have a lower APR card then rewards? or use a rewards card insted of debit card like an AMEX charge card... esstientails like food and maybe gas should be PIF each month i beleve...so maybe thats where a rewards would come in..but other purchases should be put on a lower APR card..i just got the best APR i ever got at 14.24%

---

Anything that has diminishing value immediately after purchasing it should be PIF each month.

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I am soooo in this camp!!  My belief (and habit) is to have the $$ in the bank to pay off what I charge in a week or so  The banks will always be in the business of making a profit and if they can get a person trapped into their "Debt Spiral Producer" it's a total "win" for them.  I say turn the tables on 'em and take THEIR money.  I haven't paid interest on a CC in 4 years and I'm not about to start.  But I do like using a CC because I feel safer with it opposed to a debit card.  You read these horror stories about a person's bank account being drained 'cause they're account got hacked by a terminal reader at the local grocer.  My debit card(s) rarely see the light of day. 

[boomhower]

Why not have both?  Get a Freedom, BCP, CSP, etc. for rewards while also getting some low interest non-rewards credit union cards for times you may need to carry a balance.

[Anonymous]

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@Repo-ed wrote:

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@Gollum wrote:

Almost all credit card interest rates are tied to the Prime Rate, which has been 3.25% since December 16, 2008:

http://research.stlouisfed.org/fred2/data/PRIME.txt

The average credit card interest rate is currently 15% (dunno which domains are allowed for this forum, so google it for yourself).  That's Prime Rate plus 11.75%.

In the late 1990s and early 2000s, the Prime Rate reached a maximum of 9.25%.  My credit card interest rate during that period was 5.9%.  That's Prime Rate minus 3.35% at worst.

The current discrepancy between the Prime Rate (3.25%) and the average credit card interest rate is remarkable.  I doubt credit cards have ever had a higher average iinterest rate compared to the Prime Rate than the current situation.

Since many banks are effectively betting against consumers (by offering high APR reward cards), I suggest consumers err on the side of caution:

Go for a lower APR instead of rewards.

Let's look at a hypothetical example:

John Smith has an annual income of $36,000.

He is able to route all of his spending through his high APR rewards card.

He "earns" an average of 1.5% of his income from his card rewards, so he "earns" $45 per month in rewards:

$36,000 divided by 12 months equals $3000 per month

$3000 multiplied by 0.015 equals $45.

So John Smith "earns" $45 per month as long as he pays his credit card balance in full every month.

Now imagine this unfortunate change of circumstances:

John Smith is laid off from his job, so he has to carry a balance on his high APR (22.9%) rewards card.

Carrying a balance of $2000 costs at least $38.17 in interest each month:

$2000 multiplied by 0.229 equals $458

$458 divided by 12 months equals $38.17.

I think high APR rewards cards are betting against the average consumer.  We all plan to pay in full every month, but what happens if we are not able to do so?

---

They ALWAYS bet against the consumer. Remember the toxic housing debt that made some wallstreet and politicians billions about 3 years ago or so?

---

These are actually two opposite events. High interest rates tighten credit which is not what happened in 2008. What happened in the housing bubble was really a credit bubble. We had very loose social agendas where we wanted to make everyone a homeowner. In order to do this, the US Government implicitly backed mortgage backed securities through Fannie Mae and Freddie Mac. This caused a credit bubble, especially with the advent of NINA and NINJA loans. Home prices inflated, and as with all bubbles, when the music stops there is a massive price correction. Low interest rates increase consumer credit and people tend to spend beyond their means. Nobody is "betting" against the consumer. Banks are not obligated to give you credit or favorable APR and nobody is forcing you to use it. What happened in the last financial crisis was that some very smart/lucky people realized that subprime debt was far riskier than markets were pricing in. This let them buy cheap insurance in the form of swaps on these CDOs. Blame the politicians, not the banks.

[haulingthescoreup]

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@Gollum wrote:

Almost all credit card interest rates are tied to the Prime Rate, which has been 3.25% since December 16, 2008:

http://research.stlouisfed.org/fred2/data/PRIME.txt

The average credit card interest rate is currently 15% (dunno which domains are allowed for this forum, so google it for yourself).  That's Prime Rate plus 11.75%.

In the late 1990s and early 2000s, the Prime Rate reached a maximum of 9.25%.  My credit card interest rate during that period was 5.9%.  That's Prime Rate minus 3.35% at worst.

The current discrepancy between the Prime Rate (3.25%) and the average credit card interest rate is remarkable.  I doubt credit cards have ever had a higher average iinterest rate compared to the Prime Rate than the current situation.

Since many banks are effectively betting against consumers (by offering high APR reward cards), I suggest consumers err on the side of caution:

Go for a lower APR instead of rewards.

Let's look at a hypothetical example:

John Smith has an annual income of $36,000.

He is able to route all of his spending through his high APR rewards card.

He "earns" an average of 1.5% of his income from his card rewards, so he "earns" $45 per month in rewards:

$36,000 divided by 12 months equals $3000 per month

$3000 multiplied by 0.015 equals $45.

So John Smith "earns" $45 per month as long as he pays his credit card balance in full every month.

Now imagine this unfortunate change of circumstances:

John Smith is laid off from his job, so he has to carry a balance on his high APR (22.9%) rewards card.

Carrying a balance of $2000 costs at least $38.17 in interest each month:

$2000 multiplied by 0.229 equals $458

$458 divided by 12 months equals $38.17.

I think high APR rewards cards are betting against the average consumer.  We all plan to pay in full every month, but what happens if we are not able to do so?

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Here's how you avoid this:

You're talking about running monthly expenses through plastic. And you postulate that all cards are PIF'd each month.

For those of us who do this, it is absolutely crucial that we have that one month's worth of charges set aside in a savings account. If we're laid off/ hit by a bus/ caught up in watching Downton Abbey and forget to go to work/ whatever, that month's worth of charges is paid off from that account. And the moment that we know that our income is ceasing, we stop using plastic. Thus no future CC charges to pay off, until income resumes.

Obviously, we should all have that semi-mythical 6-12 months' worth of expenses set aside in an emergency account, and a few people do. (I'm not there yet.)

But at a minimum, we have to be able to cover every single charge that's out there. That savings is for CC charges, period, not for a new alternator or emergency plumbing expenses or three dozen boxes of Thin Mints. It's ONLY to cover CC charges. (And this I DO have.)

That way, we have the rewards and minimize the risk.