Why Have Mortgage Rates Decreased and Credit Card Rates Increased?

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Credit Sesame examines why mortgage rates decreased just as credit card interest rates increased.

On February 1, 2023, the Federal Reserve announced another interest rate increase. This probably means higher interest rates on any new credit card purchases, soon.

And yet, while Fed and credit card rates continue to rise, 30-year mortgage rates declined by nearly a full percentage point since peaking at 7.08% on November 10, 2022.

Having different interest rates for different types of loans is one thing; but why are they moving in opposite directions? Why have mortgage rates decreased while credit card rates continue to rise?

Short-term vs. long-term rates

Credit card rates may rise as mortgage rates fall because of the time frame over which the money is borrowed.

Mortgage lenders think longer-term

Fixed-rate mortgages cover long periods of time, often 30 years. This means the interest rates if the same for the life of the loan. Because of that, lenders have to think long-term when setting mortgage rates. They don’t want to set a too-high rate or borrowers may refinance as soon as rates go down. Of course, they don’t want to set a low rate for 30 years only to see interest rates rise much higher after the rate is fixed. So, they take a view on what they believe may happen to interest rates in the longer term.

Credit card lenders think shorter-term

Credit cards are geared toward much shorter periods and have variable rates. There are restrictions limiting credit card companies from raising rates on existing balances, but they can raise rates on new purchases with appropriate notice to cardholders. This means the interest rate credit card companies charge can adjust to changing conditions within a few months. Compared to mortgage lenders, credit card companies are focused on short-term conditions when it comes to setting interest rates.

Short and long-term rate expectations point in different directions

Under the right circumstances, that difference in time frames can cause mortgage and credit card rates to move in different directions. For example, in February 2023 inflation remains elevated, which pushes interest rates higher. Eventually, economists expect those high-interest rates to slow economic demand enough to cool down inflation.

Interest rates are expected to rise a bit in the near term to catch up with inflation but eventually start to fall as inflation subsides. This expectation can be seen in the Federal Reserve’s economic projections:

Federal Reserve expected rates changes

and in bond market yields:

Treasure yields

Both charts have a hump-backed shape because Fed and bond market investors expect rates to get higher in 2023 before starting to fall.

With this in mind, it makes sense that a credit card company setting rates based on near-term expectations may raise rates, while a mortgage lender with a longer-term outlook might start to lower them.

Direct vs. indirect link to the Fed

Another difference between credit card rates and mortgage rates is how closely they are linked to the Fed funds rate. The Fed doesn’t directly control either one. However, many credit card issuers set their rates to adjust automatically when the Fed funds rate changes. If you look at cardholder agreements, you might see that they charge a rate equal to the Fed funds rate plus some number. Credit card companies do this to keep up with market conditions because the Fed funds rate is based on short-term lending.

In contrast, mortgage rates are not linked to the Fed funds rate because mortgage lenders have to consider a much longer time frame. Lenders might consider some of the same factors such as the Fed, most notably inflation. However, they are more concerned with where inflation is likely to be in five years than where it will be next month.

So, while many credit card rates automatically move whenever the Fed makes a rate change, mortgage rates move more independently.

Delinquent payments affect interest rates

Another difference between mortgages and credit cards is their delinquency rates. These measure the percentage of borrowers who are behind on their payments.

Credit card delinquency rates are always higher than mortgage delinquencies. The reason is that credit card debt is unsecured, while mortgage debt uses the property the loan purchased as collateral. When funds run short, people are more likely to skip credit card payments than put their homes in jeopardy by missing mortgage payments.

Delinquency rates affect interest rates. Lenders build a cushion for a certain amount of expected delinquencies into the interest rates they charge. The more delinquencies they expect, the higher they set interest rates to make up for it.

This is one reason why credit card rates are generally much higher than mortgage rates. It may also explain why credit card companies are much quicker to add a bigger cushion for delinquencies when they sense the economy weakening.

Recent conditions provide an example of this. The needle barely moved on mortgage delinquencies last year. They were up by just 0.15%. Credit card delinquencies, however, rose by 0.82%. That’s enough to result in a bigger cushion in credit card interest rates.

How consumers can use rate differences to their advantage

Interest rate differences apply to all types of loans. Consumers may wish to take this into account when choosing the loan type. The difference between credit card rates and personal loan rates widens and narrows over time. Credit card rates are generally higher than personal loan rates. When the difference grows especially wide it may be a good time to consider a personal loan to pay off credit card debt.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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