Credit Card Rates Are Low Now, But Will That Last?

Low RatesIt’s amazing how quickly information spreads and then influences consumer perception these days.  One tepid review of Federal Reserve Chairman Ben Bernanke by President Obama on Charlie Rose can send the stock market into a tizzy and send consumers scrambling for word about whether short-term interest rates will increase under new Fed leadership.

Such is the power of modern media.  But while much of the fallout from the President’s comments can be chalked up to reactionary fear mongering and premature assumptions, the issue does raise some important questions in terms of consumer financing.

How long will the low-rate environment last?  Are 0% credit card offers on the verge of extinction?  And when the Fed ultimately departs from its current policies, will that affect the rates we pay on lines of credit?

Why It Matters

We’re no strangers to revolving debt, after all.  Not only did habitual consumer overleveraging help intensify the Great Recession, but we’ve gotten right back to our old tricks during the recovery as well.  U.S. consumers racked up roughly $82 billion in new credit card debt during 2011 and 2012, and we’re on track to incur an additional $47 billion this year, according to a recent CardHub report.

With the average indebted household on the hook for a $6,591 balance, low rates are obviously needed to prevent charge-off rates from rising and to help consumers get back on a more sustainable track.

The Current Landscape

At 3.83%, the charge-off rate – which indicates the number of consumers who are unable to pay their debt obligations – is exceptionally low right now.  In fact, it has fallen more than 65% since the second quarter of 2010, largely because the economic recovery has boosted employment, giving more people more discretionary income.

The money banks have saved by eating less uncollectable debt has enabled them to offer better terms to consumers.  For example, the average 0% promotional period lasts more than 10 months these days (up more than 4.5% from last year) and initial rewards bonuses have become nearly 34% more lucrative.  Even regular rates for people at the upper end of the credit spectrum have displayed a steady decline of late, falling 0.6% – 1.5% on average for people with fair, good, and excellent credit.

Opportunities Abound for Savvy Consumers

This environment affords a number of very lucrative opportunities to those of us who managed to make it through the downturn with our credit standing relatively unscathed.  Just consider how valuable the following offers would be to someone struggling with credit card debt.

  • Slate Card from Chase:  The Slate Card breathed new life into the free balance transfer genre, which most believed to be a thing of the past in light of new consumer protections that make such offers decidedly unprofitable.  That’s great news for people who are currently carrying credit card debt, as they can transfer what they owe to the Slate Card in order to get 0% interest for 15 months without paying either a balance transfer fee (usually 3%) or an annual fee.You can use a credit card calculator to see how much such an offer would save you, but someone with an average balance and a 17% interest rate who can afford to make a $200 monthly credit card payment is looking at avoiding more than $1,700 in fees and finance charges while reaching debt freedom nine months faster than they would ordinarily.
  • Citi Diamond Preferred Card:  This card offers the longest 0% intro term on the market, at 18 months.  While it doesn’t charge an annual fee, it does carry a 3% balance transfer fee.  That means it’s best suited to financing upcoming purchases.

[Editor’s Note:  You can compare 0% credit cards at CardHub in order to find the best offer for your individual needs]

Some people may be hesitant to mess with 0% financing deals, considering how frequently issuers pulled the ol’ bait-and-switch before the recession.  However, the Credit CARD Act of 2009 prohibits issuers from raising interest rates on existing debt unless a cardholder is 60 days delinquent on payment.

“Zero percent credit cards are obviously a great financing option compared to other forms of short term credit that charge market rate interest such as other revolving credit cards, overdraft protection and payday loans. And since the CARD Act was implemented, they are even better,” says David Reiss, founding director of the Community Development Clinic at Brooklyn Law School.  “Prior to the CARD Act, credit card companies might solicit new business with a zero percent interest rate and then jack it up for sometimes legitimate reasons (for example, default on the credit card debt) but often for illegitimate reasons (for example, alleged default on another, unrelated debt).”

That doesn’t mean 0% credit cards are risk-free.  Prior to the recession, many consumers also made it a practice to jump from one 0% credit card to another, racking up debt upon debt as they went.  But despite popular opinion, the availability of interest-free financing wasn’t guaranteed.  So when the music stopped and credit markets dried up as the financial malaise worsened, people were left without a chair watching finance charges accrue once the regular rates on their cards kicked in.

In other words, using a 0% credit card necessitates having a well-thought-out payoff plan rather than the vague hope that present conditions will continue indefinitely.  “If you are confident you can avoid default (which may trigger all sorts of bad financial outcomes), this option is worth considering,” Reiss says.  Jason Kilborn – a professor at The John Marshall Law School who studies bankruptcy and insolvency – echoed these sentiments, saying, “A 0% loan that can be paid off in monthly installments of 1-3% of the principal balance is a pretty good deal, perhaps the best borrowing one could engage, assuming future income remains stable.”

Outlook for the Future

There’s no question that the time to take advantage of a 0% credit card offer is now.  That’s not to say they’re going anywhere anytime soon, but rather that they simply can’t get much better so why even risk it?

We previously thought the value of such offers had peaked in the third quarter of 2012, but falling unemployment and charge-off rates allowed issuers to step things up through the early months of this year.  But even so, we can’t ignore the potential impact of rising credit card debt levels.  If people continue to add to their balances, we’ll eventually reach a tipping point where it becomes unsustainable and issuers batten down the hatches.

That’s why you should approach 0% deals like a downtrodden stock with a bright future; you could wait to see how low the price can go, but you run the risk of it starting its ascent before you decide to pull the trigger on a buy.

With that said, Fed policy shouldn’t impact your financing plans much – if at all.  The Fed has kept short-term rates near zero since December 2008 in order to stimulate economic activity, and that’s not expected to change anytime soon.  There has been talk of the Fed ending its $85 billion-a-month bond-buying program, however, and misunderstanding of what that means is responsible for a great deal of the aforementioned consumer angst.

The Fed began buying bonds – investments that involve money being lent to organizations and then paid back with interest at a specified date – in order to essentially guarantee their safety and thereby stimulate investment activity and provide companies with the capital needed to operate.  In other words, even if the central bank scales back its activity in this area, it won’t directly impact consumer financing rates.  Besides, it only plans to do so if the unemployment rate falls significantly in the next few months, as expected.  Fed projections show the current 7.6% unemployment figure falling to 6.5% – 6.8% by the end of 2014.

The Fed has also stated that it won’t touch short-term interest rates until unemployment falls below 6.5%, if then.

But what about when Bernanke leaves his post?  Who will even lead the Fed at that time?  “Mostly likely right now is Janet Yellen and she would be a fine choice,” says Mitch Abolafia, a professor in the the University at Albany / SUNY’s Rockefeller College of Public Affairs and Policy.  And how will this choice affect the rates we pay?  “I think she would keep interest rates lower, but maybe regulate lending more – this might mean less access to credit in the long run (which might not be an entirely bad thing),” says Richard Green, a professor of public policy and director of the Lusk Center for Real Estate at the University of Southern California.

Final Thoughts

The present environment has a lot to offer people with good or excellent credit.  From initial rewards bonuses to 0% credit cards, savvy consumers can save hundreds or even thousands of dollars simply by getting the right credit card and using it wisely.

While these offers may not last forever, concerns tied to recent announcements by the Federal Reserve at somewhat overblown.  Even when the Fed does ultimately raise short-term interest rates, that won’t necessarily signal the end for 0% credit cards.  Rather, it will result in regular rates – which are based on the Prime Rates – rising.  But since the best strategy is to use a 0% credit card for financing and a rewards card for everyday purchases (which you should always be able to pay for in full by the end of the month), even higher regular rates won’t be all that problematic – at least as far as credit cards are concerned.

[Video Courtesy of Bloomberg.com]

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