Your credit card balance consequences have never been more expensive.
Average annual percentage rates, or APRs, on credit cards have reached record highs, according to a new study from the Consumer Financial Protection Bureau. In 2023, the average credit card APR reached nearly 23%, the highest ever recorded since the Federal Reserve began collecting data in 1994.
Each month, credit card issuers typically charge these interest fees on any remaining balance at the end of your statement cycle. Fed data shows that before the pandemic, average APRs were around 17%, and ten years ago they were around 13%. In other words, over the past 10 years, credit card interest rates have skyrocketed by 10 percentage points.
CFPB researchers say excessively high APRs are costing the average American – with a credit card balance of $5,300 – more than $250 a year.
Additionally, the CFPB’s analysis found that rising APRs have little to no relationship to the financing costs associated with offering the cards, prompting consumer advocates to cry foul.
“Credit card companies don’t just cover costs,” Adam Rust, director of financial services at the nonprofit Consumer Federation of America, said in a statement. “They are charging an additional ‘greed tax’.”
Rising APRs don’t just affect people with average or low credit scores. The CFPB says everyone is getting hit by higher interest rates.
“Consumers with the highest credit scores also face higher costs,” the researchers wrote.
Why are credit card APRs so high?
As the Federal Reserve has raised benchmark interest rates to their highest levels in two decades, it should come as no surprise that loans and mortgages have become more expensive across the board. It’s understandable that credit card APRs have also increased.
The CFPB’s analysis, however, took this into account. And the findings show that credit card companies can’t simply blame the record APRs on the Federal Reserve.
To determine this, the CFPB looked at what is called “APR margin.” This measure takes into account today’s higher-than-normal benchmark rates, as well as other operating costs associated with credit card lending. In effect, combining these external factors into a “prime rate”. The interest charged by credit card companies on top of this is called the “margin APR” rate.
Even taking into account operating costs and high benchmark rates, the APR margin in 2023, at 14.3%, has also never been higher.
According to the CFPB, excess APR fees cost consumers a total of $25 billion last year.
“This additional interest burden could push consumers into persistent debt, accumulating more interest and fees than they pay each year in principal,” the CFPB researchers wrote.
According to Consumer Fed’s Rust, credit card companies are able to do this because of the lack of competition in the industry.
Federal research confirms this. Earlier this month, the CFPB released a separate report that found that the largest credit card issuers are the ones that disproportionately raise their APRs, while smaller banks and businesses have often lower interest rates on average by 5-10 percentage points.
These findings are raising important antitrust concerns among regulators and consumer advocates.
The CFPB is already taking steps to reduce credit card late fees to $8, down from about $30, as part of the Biden administration’s war on what it calls “junk fees.” Likewise in Congress, a bipartisan group of lawmakers is trying to pass a measure called the Credit Card Competition Act in an effort to curb the surge in fees. At present, both efforts are proposals; neither is in effect.
Meanwhile, earlier this week, Capital One announced its plans to buy rival Discover. As two of the largest credit card issuers in the country, a merger between Capital One and Discover would further limit competition in the industry.
Rust told Money that if the deal goes through, credit card APRs are likely to go even higher.
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