Why are even the best credit card rates still so high?
The best credit card rates are still very high because the risk associated with an unsecured line of credit is quite high, and the high interest rates are needed to offset this risk. A recent Federal Reserve study estimated that 13.7 percent of the outstanding credit card balances, even at the nation's biggest banks, would be in default if we were to have a "severely adverse" economic downturn as in 2008. They compared that to only 2.2 percent of the dollar amount of residential mortgages. That makes credit cards over six times as likely to default. If you multiply a typical mortgage interest rate by six, you are going to be up near credit card interest rates.
If it were profitable to offer substantially lower rates, the competitive market would be offering them. The fact that we do not see them in a highly competitive market is an indicator that the rates are based on risk, which is a cost to the companies. A better question may be to ask why we don't see more secured credit cards on the market, or greater use of debit cards. Fewer secured cards may be for legal reasons, but it more likely is because of the ready availability of debit cards, which substitute in most ways for credit. Most of the interest Americans have in credit cards is cultural: in Europe, credit card use is very low, while debit card use is very high. In many respects, this is similar to the fact that in America, cellular phone service is essentially a credit-based system, whereas most of the rest of the world uses a prepaid system.
What’s the best way to use a 0% intro rate?
It is financially good to "surf" introductory rates of 0%, but only if you are going to save the money and earn interest on it. If you are merely kicking the can down the road and thinking you will have more money later, good luck -- but bad idea. Paradoxically, 0% interest rate surfing is best for people with stellar credit who have the ability to pay the balance off at any time.
Let's say that someone has $1,000 invested in the stock market. The stock market returns, on average, about 10% per year. This person now buys $1,000 worth of furniture on a 0% card, and he opens new cards and transfers the balance at 0% for a year. On average, he will have earned $100 on his investment at the end of the year and paid $0 to the card companies. At the end of the year, on average, he pays off the furniture and has an extra $100 as well. If this person has no other assets, then the $100 extra is risky, because if the market goes down, he will end up without enough money to pay off the debt.
On the other hand, if this person could have paid off the bill with other assets at any time, then the risky $100 may be worth it. The point here is that surfing 0% rates is most advantageous if one can still pay off the card if there were ever a reason to do so -- such as no more cards will allow you to keep the rate at 0%. Worst case scenario is that he will pay $1,000 a year later, and that $1,000 is a larger fraction of his total wealth. If the same person surfed at 0% for a year, but invested no money, then they are no better off with the deferred payment, but they are at higher risk.
Should you always try to get the credit card with the best interest rates?
No, you should not always get the credit card with the best rate. First, rate only matters if you carry a balance -- you do not pay off the bill in full every month. About 65 percent of credit card users pay their bill off every month (though this varies depending on the economic environment). If you pay every month, the interest rate is not a primary consideration (but consider what happens in a downturn). If you do carry a balance, then reducing the interest rate (by transferring balances to lower or 0% interest cards) is one of the first things you should do. Then, paying as much as possible of the highest interest rate card every month is the best financial strategy. However, from a psychological point of view, it may be better to work on debts that you can fully pay off in a short time (because there is joy and a feeling of accomplishment from paying them off) -- you need to know yourself.
Second, if you pay the card off every month, then features matter, and one can choose from reward points and cash back to other features (extended warrantees, purchase protection, price protection, etc.) that may be useful or important to you. It may be useful to have a mix of cards that are used for different reasons (e.g., one card that has purchase protection and extended warrantee for buying infrequent electronics, and an "everyday" card that gives cash back).
Third, if you are trying to repair damaged credit, then you want a credit card that will allow you to do so, and having a more reputable or accommodating bank issue the card may be of greater value than the interest rate (you shouldn't revolve a balance if you are repairing credit anyway).
Why aren’t there more credit cards with low fixed rates?
You cannot find cards with low fixed rates because low fixed rates introduce yet another variable into the equation, which is interest rate risk. More risk equals higher rates. So now, in addition to the risk of default, the credit card company needs to worry that their cost of borrowing money will increase. Credit card companies borrow money to loan it to a customer (they front the money to the merchant and get the money back when the card balance is paid). With a variable rate, if there is an increase in what they have to pay to get money to loan, the customer's interest rate goes up by the same amount, which means that that "profit margin" is the same for the issuer.
With a fixed rate card, the issuing company now has two types of risk: that the consumer will default (true for all cards), and also that interest rates will go up, which will decrease their profit margin. If interest rates went up enough, issuers would not have enough to cover the expected losses due to defaults. This is exactly the same reason that 30-year fixed rate mortgages have higher interest rates than 3-year variable mortgages.