Consumer Advocates Explain the Reasons for High Credit-Card APRs

Consumer Advocates Explain the Reasons for High Credit-Card APRs

Credit-card issuers have been increasing their interest rates, leading to inflated borrowing costs for cardholders. This information comes from new research conducted by federal regulators. While credit-card annual percentage rates (APRs) have risen due to the Federal Reserve’s benchmark interest rate hikes, the Consumer Financial Protection Bureau (CFPB) reveals that there are additional factors contributing to the higher costs of unpaid credit-card debt.

According to the CFPB researchers, APRs have been growing because they are rising higher above a widely-used benchmark rate. This trend has been ongoing for some time, but it reached a new record in 2023. The researchers note that the spread between the average APR for a credit card with a balance and the baseline rate, known as the prime rate, has never been wider. Most banks use the prime rate to set their rates. As a result of this widening margin, cardholders with a balance paid over $250 more last year. The researchers estimated this cost based on a $5,300 balance. It is important to note that average credit-card balances in the third quarter of 2023 surpassed $6,000.

The widening margin between credit-card APRs and the prime rate resulted in major card issuers earning an extra $25 billion in interest revenue last year. This increase in revenue comes at a time when Americans finished 2023 with $1.13 trillion in credit-card debt, and card delinquency rates are at their highest point in over a decade. A recent survey also found that over one-third of U.S. households have more credit-card debt than savings.

The CFPB researchers analyzed Federal Reserve data on average APRs for accounts carrying a balance and compared it to the prime rate, which typically sits three percentage points above the federal funds rate. In the fourth quarter of 2023, credit cards with a balance had an average APR of 22.8%, which is a 14-percentage-point margin on top of the current 8.5% prime rate. This is in contrast to ten years ago when cards with a balance had an almost 13% APR when the prime rate was 3.3%, resulting in a 9.6-percentage-point spread.

The CFPB analysis has raised skepticism and has led consumer advocates to criticize credit-card companies for their role in rising costs. They argue that there is no reason for credit-card company CEOs to charge interest rates that far exceed federal rates, other than greed. The concern over rising rates is further amplified by the news of Capital One’s plans to acquire Discover, which would create the largest credit-card company by loan volume. Critics worry that Capital One’s increased market power will lead to higher APRs on its cards.

While some banking groups push back on the idea that card issuers are increasing rates solely because they can, the CFPB analysis has shed light on the widening margin between credit-card APRs and the prime rate. The Consumer Bankers Association argues that the research overlooks the growing share of cardholders with very low credit scores. Lower credit scores can result in higher APRs due to the perceived risk for lenders.

Despite the high APRs, there are ways for credit-card users to save money. Dave Grossman, founder of Your Best Credit Cards.com, suggests shopping around for credit cards with lower rates and leaning towards cards without rewards as they tend to have higher rates. Balance-transfer cards, which offer a 0% rate for a specific period, can also be a great option as long as users take advantage of the 0% window to pay down their balance. Grossman also advises cardholders to negotiate their rates, as there is a chance that the card issuer will lower them based on the individual’s payment history and credit profile.

In conclusion, the research conducted by the CFPB reveals that credit-card issuers have been increasing APRs, leading to higher borrowing costs for cardholders. The widening margin between credit-card APRs and the prime rate has resulted in major card issuers earning billions in additional interest revenue. This increase in rates comes at a time when American households are carrying significant credit-card debt. However, there are strategies that cardholders can employ to save money, such as shopping around for lower rates, avoiding rewards cards, and negotiating their rates with their primary bank.