The average consumer credit card rate is 16.75% as of May 15, 2016 according to the latest credit card tracking bureau. With the US Bank Prime Rate at 3.25%, credit card companies are charging 13.5% over Prime. In other words, credit card companies are making big bucks off you!
The US Bank Prime Rate or “lending rate” has averaged 3% above the Federal Funds rate, which is currently at 0.25% thanks to BenGenie. The Prime Rate is used to adjust the interest rates for HELOCs, credit cards, and student loans. The Prime Rate is considered the rate at which banks lend to the most creditworthy borrowers.
With a 13.5% spread over Prime, credit card companies are essentially saying they require a 13.5% return over Prime in order to be in the business of lending credit with a card to the average consumer. If all consumers paid their credit card debts in full and never welched on a payment, the spread over Prime rate would probably be close to zero. The other way to lower credit card rates is if consumers reduce demand for credit card usage and the government either regulates more tightly and/or encourages more competition.
AVERAGE CREDIT CARD RATES
My one and only personal credit card has a interest rate of 10.25%, or a full 7% points over prime. I’ve had the card for 10 years and have never missed a payment in 120+ billing cycles. Sure my rate is still 6.5% below the average, however, compared to mortgage rates below 4% and student loan rates below 3%, 10.25% is ridiculously high.
I gave my credit card company a ring to see if they can lower the rate, even though I never plan to give them the satisfaction of making 10.25% off me, and they politely declined. Since I only have one personal credit card, I don’t easily have a backup to switch to, leading me not wanting to spend the time to apply a new.
High interest rates should discourage you from using your credit card and at the very least, never carry a balance. We know in practice, this is not the case as credit card companies earn billions a year from consumer’s lack of spending discipline. I hope as a Financial Samurai reader, you know better than to ever spend more than you earn and carry a balance.
Looking for an awesome travel rewards credit card? Check out the Chase Sapphire Preferred® Card and others. I use my Chase credit card for all my business and travel spending to get points for more free travel, insurance in case my bags are lost or my flight is stuck, and more insurance for defective products I buy and want to return. Everybody should have a credit card for the free 30 day credit. Just make sure to pay off your credit card every month in full! Check out some of the benefits:
- Earn 50,000 bonus points when you spend $4,000 on purchases in the first 3 months from account opening. That’s a ~$650 value right there.
- Named a ‘Best Credit Card’ for Travel Rewards by MONEY Magazine.
- You get 2X points on travel and dining at restaurants & 1 point per dollar spent on all other purchases.
Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
A great feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging! There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
Finally, they recently launched their amazing Retirement Planning Calculator that pulls in your real data and runs a Monte Carlo simulation to give you deep insights into your financial future. Personal Capital is free, and less than one minute to sign up. Ever since I started using the tools in 2012, I’ve been able to maximize my own net worth and see it grow tremendously.