(PRWEB) June 24, 2005
Do you think the smartest consumers are those with no credit card debt at all? You might be surprised to discover that savvy credit card consumers are using their low interest credit cards very cleverly, says Peter James, financial advisor with http://www.Best-in-Credit-Cards-Online.com.
In fact, Americans who hold credit cards with the lowest interest rates are not the ones you might expect Â they're borrowers who actually carry the highest credit card debt, according to new research James found online. This new twist runs counter to conventional wisdom which assumed that credit card users with high balances posed a bigger repayment risk and therefore were charged the highest interest rates.
A recent study of Ohio consumers indicates that they are shopping around and using low interest credit cards to minimize payments. According to Lucia Dunn, co-author of the study and professor economics at Ohio State University, "people with large balances are playing the game. They have the most incentive to find cards with the lowest rates, (which is) what they are doing."
It's the newest shell game, but this time consumers are simply playing by the low interest marketing rules set by banks and credit card companies trying to keep and attract new customers.
The OSU study shows that credit card holders who carry a balance, but have missed no minimum payments, have an annual percentage interest rate (APR) of 13.9 per cent Â a full 1.2 percentage point lower that than of card holders who pay off their balance every month. The highest APR of 15.9 percent went to those who carry credit card debt but have missed one or more payments.
Even more surprising, among consumers who carry balances and have not missed payments, an increase of $10,000 in their credit card debt was linked to a full one-point decrease in overall APR.
Dunn conducted the study with Taehyung Kim, a graduate student at Ohio State when the study was done, and Gene Mumy, an associate professor of economics at Ohio State. Their results were published in the most recent issue of the journal Economic Inquiry.
ÂUntil this survey, there has been almost no data available to researchers on credit card use, which is surprising given the importance of the issue,Â said Dunn.
With the dearth of real research, most people believed banks would view high credit card balances as a default risk, and would give these consumers higher interest rates, she said. While this seems logical, this study suggests something altogether different is going on.
For one, Dunn said she believes banks have become more sophisticated in evaluating credit risk, and no longer penalize people simply for having large balances.
ÂIf anything, banks want a low-risk, high-balance customer,Â she said. ÂThat's how they make the most money. They want consumers to carry a balance, as long as they are going to continue paying it off.Â
At the same time, banks have become more competitive and are aggressively seeking new credit card customers by offering low interest introductory rates Â sometimes even 0 percent APR balance transfer credit card offer as their best credit card rate.
One study showed that from 1991 to 2001, the number of mailed credit card solicitations increased fivefold to 5 billion per year. The number had reached 6 billion by 2003.
ÂAll people have to do to find a better interest rate is go through their mail,Â Dunn said. ÂThat's what people with balances seem to be doing, switching to whichever card will offer the best deal.Â
Convenience users tend to have credit cards with higher APRs because they have no incentive to search for lower rates. Because they pay off their balances each month, they never pay interest anyway.
Those who have missed payments are the ones who are seen by banks as truly risky. That's why they pay the highest APR on their cards, Dunn said.
While some consumer advocates have argued that the government should impose credit card interest rate ceilings, the results of this study suggest that may not be necessary, she said.
ÂOur results show people are taking care of themselves. They are not being taken advantage of and know how to find the lowest credit card rates. There seems to be enough competition in the market,Â Dunn said.
ÂOf course, some people think that overall the rates are just too high, but if people are willing to pay these rates, there's nothing the government should do. Competition in the market should bring those rates down.Â
Kim, who was a graduate student at Ohio State when this study was done, now works for Wachovia Corporation, a North Carolina-based bank. Neither Dunn nor Mumy have any paid associations with the credit card industry.
The study followed 500 randomly chosen credit card holders every month for 18 months. It did not specify any differences between credit card useage through Visa, MasterCard, American Express, Discover, Chase, Capital One or other bank credit cards and credit card companies operating in the US. To find the best low interest credit cards, visit http://www.Best-in-Credit-Cards-Online.com/best-low-interest-cards.htm today.