According to recently released figures, the difference between the interest rates offered by rewards credit cards and non-rewards credit cards has increased over the course of last month as card issuers struggle to meet the costs of their rewards and incentives programs.
As of 31 July, the average interest rate for a consumer credit card was 16.5 percent. This figure has risen slightly from the mid-month average which was 16.43 percent. However, the average interest rate offered on rewards credit cards was much higher, with an average of 17.27 percent. This is a much larger increase, with the average rate having jumped from 17.09 percent mid-month.
Credit card offers often come with seemingly generous perks and incentives including free travel, hotel stays, cash back or other gifts and rewards.
However, these ‘free’ gifts do actually come at a cost to consumers. This is becoming increasingly apparent as the difference in interest rates between rewards credit cards and non-rewards credit cards continues to widen.
This same pattern can be seen in the business credit card market as well. The average interest rate charged on non-rewards business credit cards actually fell in July from 14.6 percent to 14.47 percent. However, in the same month, the average rate for business rewards credit cards remained stable at 16.05 percent.
However, a consumer’s credit rating can also have an effect on the interest rate which they are offered. There can be as much as 4.1 percent difference between the rates offered to a credit card applicant who has a strong credit rating and an applicant with average credit.
The higher interest rates on rewards cards are implemented in order to cover the costs of offering the free gifts, cash back and cardholders benefits which come as standard with most rewards credit card accounts. The increasing gap between rewards cards and non-rewards cards means that consumers who carry a balance on their credit cards are beginning to reconsider what the best credit card for their needs actually is.
It is becoming increasingly true that it can be best to opt for a card with fewer perks and a lower interest rate in the long run. However, those consumers, and indeed business customers, who pay off their balances in full each month, thus avoiding interest payments, can continue to enjoy the perks offered by their rewards cards, without having to pay extra to take advantage of them.