Risk, Not Law, Cause for Rising Credit Card Rates

Rising credit card interest rates have captured the media's attention over the past few months. Even for Americans whose credit scores have not been impacted by the nation's financial crisis, sudden credit card rate hikes have caused concern. Some pundits argued that increased industry regulation could force all cardholders to pay more for their plastic. However, the new credit card law signed by President Obama may not be to blame for rising rates.

According to credit expert Gerri Detweiler, author of the book Reduce Debt, Reduce Stress, changes to credit card regulations aren't the only reasons lenders have tightened up their lending guidelines."The new credit card law won't go into effect until February 2010, so I don't think that's the reason issuers are looking for higher scores," Detweiler said. "Due to rising defaults, they are trying to rein in risk. That is why they are looking for more creditworthy customers."

Credit Card Interest Rates by Credit Score
Borrowers who once enjoyed low- or no-interest cards because of their attractive credit scores have seen their status slip this year. "A year ago, a credit score of 720 to 740 would mean you are golden," Detweiler said. "This year, you will need a 750 score or above to get the best deals." Using Detweiler's estimates and statistics provided by Fair Issac, creators of the FICO Score, at least one in five American cardholders may see higher credit card interest rates this year.

Many lenders classify cardholders into one of four broad categories (these categories are meant to be general guidelines and can vary by creditor):

· Excellent Credit (FICO 750 or higher): Many issuers are no longer content with merely earning interchange fees on purchases made with no-interest credit cards. Rates for the most creditworthy borrowers have crept as high as 9.9%.

· Good Credit (FICO 700-750): The floor for competitive credit card rates has shifted from a FICO Score of 680 to 700. While many borrowers in this category once enjoyed 7-9% interest rates, many lenders now require double digit percentages for cardholders with credit scores below 750.

· Fair Credit (FICO 650-700): A few missed payments or a forgotten student loan bill can cause major damage to a credit score. Many cardholders in this category endure interest rates in the upper teens and even above 20%.

· Bad Credit (FICO below 650): Many issuers have tried to "manage out" their riskiest customers by hiking credit card interest rates above 20% and charging exorbitant fees, which often leaves cardholders with very little available credit.

According to many industry analysts, the minimum required credit score to get approved for a credit card at most banks is now at least 650.Consumers with scores below that threshold may have to rely on secured cards or on credit rehabilitation programs.

Bad Credit

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