Credit card interest rates hit record levels

Credit card interest rates have risen to record highs in recent years, and the growing part of the formula that generates profits for card issuers is partly to blame. analysis Consumer Financial Protection Bureau.

Average consumer paid interest rate of 22.8% on their credit card balances at the end of 2023, the highest since the Federal Reserve began tracking the data in 1994.

Interest costs, expressed as an annual percentage rate, have risen about 10 points over the past decade from 12.9%. Total credit card debt and average balances are also at record highs.

“By some estimates, credit cards have never been more expensive,” writes CFPB’s Dan Martinez, senior credit card program manager, and financial analyst Margaret Seichel.

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Credit card APRs began rising sharply in 2022 when the Fed raised its benchmark interest rate to curb inflation. Interest rates on credit cards and other consumer loans typically move in tandem with Fed policy, according to a barometer known as the prime rate.

However, credit card companies also simultaneously increased their average “annual margin,” according to the CFPB.

The annual margin is the difference between the total annual interest rate and the “prime rate.” It is a measure of card issuers’ profits commensurate with their credit risk, according to the CFPB.

These profits are at an all-time high. They averaged 14.3% in 2023, up from 9.6% in 2013, according to the watchdog’s analysis published Thursday.

Nearly half of the increase in overall credit card interest rates over the past decade is due to issuers increasing their annual margins, the analysis found.

However, CFPB authors question whether these higher returns are justified since issuers do not appear to be taking more risks, such as extending credit to more consumers with lower credit scores.

The share of consumers with “subprime” credit scores holding credit cards has been “relatively stable,” they said.

The CFPB estimates that large credit card issuers have collected $25 billion in additional interest due to increases in average annual margins over the past 10 years. The average consumer with a credit card balance of $5,300 in 2023 would pay an additional $250 because of this increase, according to the agency.

“Increasing average annual margins… have contributed to rising issuer profitability over the past decade,” Martinez and Seikel wrote. “Higher annual profits have allowed credit card companies to generate revenues that are significantly higher than other banking activities.”

The Consumer Bankers Association, a trade group representing credit card companies and other financial services companies, disputed the CFPB’s margin and profit characterizations.

“The CFPB argues that the rise in credit card interest rates over the past decade has occurred against a backdrop of “a relatively stable share of cardholders with subprime credit scores,” CBA President and CEO Lindsey Johnson said in a written statement. “That’s simply not true.”

For example, about 42% of borrowers with “deep subprime” credit had a credit card at the end of 2022, the highest percentage since at least 2013, according to the CFPB. data. “Deep Subprime” Borrowers Have the Worst Credit Stories relative to other groups. Their credit score is below 580.

“Lenders will only lend at a rate that compensates them for the risk they are taking,” said Greg McBride, chief financial analyst at Bankrate.

The share of other “below prime” borrowers—near-prime and subprime consumer credit card holders—has been relatively stable over the past several years, according to CFPB data. Their credit scores range from 580 to 659.

Credit card delinquencies may be an additional risk factor, prompting card issuers to increase margins, McBride said.

For example, “severe” card delinquencies—payments 90 days or more past due—have increased across all age groups, a signal of financial stress. according to to the Federal Reserve Bank of New York.

About 9.7% of credit card balances were seriously overdue in the fourth quarter of 2023, up from 7.7% a year earlier. Despite an increase in recent months, the current share of seriously overdue debt is unchanged from 2013.

However, industry concentration is another reason why card companies may have increased annual profits, McBride said.

“Higher concentration of market share does lead to greater pricing power,” he said. This also applies to all types of industries, including airlines and cable companies, he added.

Large lenders have a majority share of the credit card market. The 10 largest companies control 83% of this territory, according to the CFPB.

Additional consolidation may occur in the near future. Capital One Financial announced this week that it will acquire Discover Financial for $35.3 billion. They are among the largest credit card issuers in the country. The merger still requires regulatory approval.

There is a way consumers can avoid higher interest rates entirely. For example, experts say consumers can pay their credit card bills on time and in full every month.

In other words, don’t carry a scale with you. Such cardholders will not pay interest. It’s important to note that making the minimum monthly payment on your card does not pay your bill in full.

Paying your monthly payments in full and on time is also a good way to boost your credit score, which could make cards with lower interest rates affordable to consumers, McBride said.

Consumers with good credit will also be able to transfer their existing balance to the new credit card with an introductory 0% APR offer, McBride said. Some issuers are now extending such 0% interest rate offers for up to 21 months, which “gives you a good opportunity to pay off debt without the hurdle of high interest rates,” he said.

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