The recent increase in short-term borrowing rates from the Federal Reserve aren’t expected to meaningfully impact most credit cardholders’ bottom lines. However, there may be an impact on another popular credit card feature:
“One side effect may be that credit card companies will be less generous with 0% interest offers.
“As the Federal Reserve moves away from 0% interest rates, credit card issuers will do the same,” says Bankrate.com’s Greg McBride. “As interest rates rise, offer periods will get shorter, the promotional rates will move higher, or both.”
McBride notes that while 0% offers weren’t as prevalent a decade or so ago, “those that did exist quickly evaporated as interest rates rose from 2004 to 2006.”
There is an argument that reductions in these introductory rate offers might be a net benefit for consumers:
“The Consumer Financial Protection Bureau released a report on the implementation of the Credit Card Accountability Responsibility and Disclosure (CARD) Act last month in which the agency labeled these types of cards an area of concern. “Deferred-interest products remain the most glaring exception to the general post-CARD Act trend toward upfront credit card pricing,” the report noted. Consumers with low credit scores end up paying a high interest rate if the debt isn’t paid off at the end of the introductory period.”
If deferred-interest prooducts are transparent in their pricing and their terms, I would argue that the benefits of such products to consumers who use them resposibly outweighs the costs to those who use them irresponsibly. Regardless, it appears that such products will continue to exist (in some form or another):
“While long introductory periods may become a thing of the past, interest-free offers are unlikely to disappear anytime soon, says NerdWallet’s credit expert Sean McQuay. “Raising to anything above 0% loses a lot of the marketing appeal of the category.”
Overview by Alex Johnson, Senior Analyst, Credit Advisory Service at Mercator Advisory Group
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