Recent statistics show that Americans are as addicted to debt as
ever -- with one notable exception. Credit card debt has declined
in the years since the Great Recession began, and a look at credit
card interest rates makes it easy to see why people have shied away
Credit card rates have been slow to join the trend toward
sharply lower rates in recent years. In fact, relative to
inflation, some credit card rates are actually higher now than they
were in 2007, the year before the recession began.
Credit cards refuse to move with the times
Viewed in isolation, credit card rates might seem to have gotten
cheaper. According to
from the Federal Reserve, between 2007 and the end of the first
quarter of 2012, the average rate on all credit cards dropped by
0.96 percent, to 12.34 percent. The average rate for customers who
were actually paying interest (as opposed to those customers who
pay off their balances every month) dropped even farther, falling
by 1.64 percent to 13.04 percent.
So far so good -- falling interest rates are usually a clear win
for consumers when it comes to borrowing. However, putting those
rate declines into context shows they might not be such a bargain
At the end of 2007, the year-over-year inflation rate was 4.1
percent. By the first quarter of 2012, it was down to 2.7 percent,
a drop of 1.4 percent. This exceeds the average rate decline for
all credit cards, meaning that they are now more expensive on an
inflation-adjusted basis. The rate drop for consumers currently
paying interest was a little larger, but on an inflation-adjusted
basis, this rate has dropped just a fraction of 1 percent.
Consider this in the context of other rate declines over the
same period: 48-month car loan rates dropped by 2.7 percent over
the same period. 30-year mortgage rates dropped by 2.75 percent.
Relative to the broader interest rate trend, credit card rates have
not come down nearly as much.
This appears to be reflected in the choices consumers are making
about debt. Although total consumer debt is up since 2007,
credit card debt
is actually down. The bad news is that consumers are still taking
on debt in record amounts; the good news is they are at least
making rational decisions about seeking relatively cheaper forms of
Minimizing your credit card expense
To follow this rational example, here are some things you can do
to minimize your credit card costs:
Use alternative forms of debt.
If a car loan, home-equity loan or other borrowing option is a
cheaper way to fund your purchase, then leave your card in your
Shift your balances to the cheapest cards.
Know which cards in your wallet carry the highest interest rates.
Repay those first, and try to use the cheapest ones instead in
Shop for better credit card rates.
The credit card industry is competitive, so keep an eye out for a
better deal. The
best low-interest cards
may lack some of the rewards perks of other cards, but they're
likely to cost you less in the long run.
Pay off your balances every month you can.
The best way to save on interest is to pay off your card balance
each month before finance charges can accrue.
Lastly, you should never take on debt without having a realistic
how to repay it
. While the above steps can make credit card use more affordable,
they are no substitute for living within your means.