August 16, 2012

How the Bond Market Could Make Your Credit Card More Expensive


Credit card rates might be going up soon, thanks to complications in the bond market that might drive key economic indicators that impact the interest rates that credit card issuers charge.

Since the beginning of 2012, investors have been attracted to corporate bonds and high-yielding debts as worries continue over the volatility of stocks and other equity-based assets. The trend, combined with low rates on Treasury notes from the U.S. Federal government, has made it cheap for both the federal government and companies to borrow money. Since these rates are both directly and indirectly tied to the rates that credit card issuers charge for credit cards, many consumers have been enticed by incredibly low interest rates on credit cards.

Several issuers are offering credit card rates interest just slightly above 10%, thanks to a consistently low Prime Rate, which has stayed unchanged at 3.25% since 2009.

This unusually low rate has been maintained to keep credit loose, affordable, and readily available at a time when consumer spending has fallen and banks are less eager to lend out to individuals.

After three years of a consistent rate, there is concern that the rate might be ready to change in the near future. One way to track the potential for the Prime Rate to rise is to look at yields on Federal debt, such as the 20 year Treasury bill. If that rate goes up, the Prime Rate is likely to rise as well, since the Treasury bill is the benchmark used to set almost all other types of debt, including corporate bonds and mortgages. Higher Treasury yields would mean higher mortgage rates, which, in turn, would cause banks to charge higher interest rates on credit card debt.

The 20 year T-bill actually began to fall earlier this summer, but growing confidence in the American economy has caused that rate to rise in recent weeks, and some analysts are expecting much higher rates in the coming months. Those higher rates would inevitably force credit card issuers to increase their rates, and end the era of low credit card debt for the American consumer.

Still, there are powerful forces fighting this trend. Fed Reserve Chariman Ben Bernanke has recently said that he's devoted to keeping rates low until the end of 2014--which would suggest that the Prime Rate, and credit card debt, would keep their low rates for at least the next two and a half years.

But the Fed isn't famous for keeping their word and, in any case, market forces might make Ben change his mind. A stronger American economy and higher consumer spending could inevitably move the Prime Rate higher and end the current reign of ultra-low interest credit cards.

Mike Foster is a contributing writer at CreditDonkey, a credit card comparison and reviews website. Write to Mike Foster at mike@creditdonkey.com


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