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Dr. Ravid at the Midwest Finance Association and on WalletHub

Dr. S. Ravid AbrahamDr. S. Abraham Ravid, professor of finance and chair of the finance department at Sy Syms School of Business, is also past president of the Midwest Finance Association, having served until August 2020.

On Friday, March 19, 2021, Dr. Ravid led a team of senior faculty from the University of Chicago, Northwestern University, University of Minnesota and the University of Indiana in the second Ph.D. symposium of the MFA, of which Dr. Ravid is the founder.

A selection committee, led by Dr. Ravid and including a faculty member from the University of Michigan, selected five outstanding doctoral students’ papers out of over 200 submissions. The students presented their work and the faculty discussed the papers. The faculty then convened and decided on a best paper award.

This year the award was split between a student from the Wharton School of the University of Pennsylvania and a student from NYU Stern School of Business.

For WalletHub’s recent report on “Low Interest Credit Cards,” Dr. Ravid offered the following advice:

Does the definition of a “low interest” credit card change over time?

A low credit card interest rate is not a legal definition; hence, it can be used in different ways in advertising.

Does it ever make sense to get a credit card with a low regular APR? (vs. a 0% credit card or paying in full)

Credit cards are unsecured risky loans from the point of view of the lender, and therefore generally carry a high-interest rate. You should try not to borrow on your credit cards. If you do carry a balance, which is never a good idea, your best bet is to keep switching to zero interest rate cards and as soon as the promotional rate is over, move on to another card. This can be a short-term solution for a cash shortfall, but however, it is not a long-term solution because your credit score will be affected, and you may run out of credit cards and options. If you do borrow long term, which again, you should not, you may indeed consider a low-rate credit card. However, beware of fees and other provisions which may increase the effective rate you are paying.

Compared to loans, does any credit card really have a low-interest rate?

As I said above, credit cards are unsecured risky loans from the point of view of the lender, and therefore generally carry a high interest rate. Any secured loan such as a car loan or a mortgage will carry a lower interest rate. However, if you fail to pay a secured loan, the creditor may take possession of the asset, i.e., the house or the car. Indeed, that is why the rates are lower.

If rates are so low in general, why aren’t credit card interest rates lower?

Credit card rates do change as interest rates in the economy overall change; for example, the average credit card borrowing rate now is somewhat lower than it was pre-pandemic. However, because credit card debt represents unsecured loans, and further, credit card receivables are often securitized (the balances are sold to investors), issuers keep a high spread from the low-risk rates, such as Treasurys of highly rated corporates. So again, try not to carry a balance!