In the three years to 2017, APRs for business credit cards have risen an estimated 0.6 percentage points. As inflation has been rising and unemployment has approached its natural rate, the FOMC has started to increase the target range for the federal funds rate after nearly a decade of stagnancy. For example, the FOMC voted to increase the target range by 25 basis points in June 2017 following similar upturns in December 2015, December 2016 and March 2017. The current target rate ranges from 1.00% to 1.25%. Most credit card issuers offer variable-rate APRs. These rates are tied to an index that moves in concert with the federal funds rate, which allows credit card issuers to reconcile their own interest expenses. As a result, these upturns in the federal funds rate have contributed to growth in APRs across the market.
Demand for business credit card services has also been increasing during the past three years. Many businesses use credit cards to purchase goods and services in order to facilitate their operations. Therefore, a growing number of US businesses enlarges the customer base for business credit cards and thereby contributes to a greater demand for services. In the past three years, the number of businesses has been growing in line with the economy. Moreover, the percentage of services conducted online has been increasing due to the proliferation of technology. To pay for online services, businesses have increasingly required digital mediums of exchange, thus boosting the need for credit cards. Overall, stronger demand for business credit card services has allowed credit card issuers to increase APRs.
Despite rising service rates, price volatility has been low during this period. Credit card issuers have engaged in strong competition, which has deterred them from raising APRs too rapidly for fear of losing clients to competing firms. Consequently, buyers have been able to budget accurately for services. Nevertheless, because rates are expected to increase through 2020, buyers should seek out fixed-rate APRs whenever possible. Buyers can also pay down their existing credit card balances now to avoid higher interest expenses.
During the three years to 2020, APRs for business credit cards are forecast to increase 0.7 percentage points. All else equal, the federal funds rate is projected to increase further in order to offset rising inflation. ProcurementIQ expects that there will be several interest rate hikes in 2017 alone. As the federal funds rate increases, it will become costlier for card issuers to borrow money to remain liquid. As a result, credit card issuers will raise APRs to offset these additional interest expenses.
Stronger demand for business credit card services is anticipated to be the main cause of price growth during the period. As the economy grows, the number of businesses in the United States is projected to continue increasing. Many of these new businesses will require credit cards in order to facilitate their operations, thereby augmenting demand for business credit card services. Additionally, corporate profit is projected to increase at a faster pace as the economy continues to grow during the next three years. As businesses achieve higher levels of profit, they will have a greater capacity to pay back their debt obligations. This safeguard enables businesses to purchase more goods and services, using credit cards to build their credit history. Thus, service rates will rise faster through 2020 in response to stronger aggregate demand.
Despite rates ultimately rising, volatility in APRs is anticipated to remain low during the next three years. Credit card issuers will continue to engage in robust competition, which will prevent them from raising prices too rapidly. Still, buyers should seek out business credit cards that offer fixed APRs rather than variable APRs in order to hedge against this anticipated price growth. Buyers can also begin to pay down their existing card balances now, to avoid higher interest expenses in the future.