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Credit card issuers raise ‘APR’
As the Federal Reserve raises its benchmark interest rate to 2022, credit card annual interest rates begin to rise sharply Mild inflation. Interest rates on credit cards (and other consumer loans) typically change in tandem with Fed policy, according to a barometer called the “prime rate.”
However, according to the CFPB, credit card companies also increased their average “annual interest rates” at the same time.
The APR margin is the difference between the total APR and the “prime” interest rate. The CFPB says it’s an indicator that a card issuer’s profits are commensurate with the risk of its loans.
Those margins are a record high: They will average 14.3% in 2023, up from 9.6% in 2013, according to an analysis released by the regulator on Thursday.
Analysts say that nearly half of the growth in total credit card interest rates over the past decade is due to card issuers raising their annual interest rates.
However, the CFPB authors question whether these higher profits are justified because issuers do not appear to be taking on greater risk by extending credit to more consumers with lower credit scores.
They said the proportion of consumers with “subprime” credit scores who hold credit cards has been “relatively stable”.
The CFPB estimates that major credit card issuers have earned $25 billion in additional interest over the past 10 years by raising average annual interest rates. The average consumer with a credit card balance of $5,300 will pay an additional $250 in 2023 due to this increase, the agency said.
“Increases in average annual interest rates … have improved issuer profitability over the past decade,” Martinez and Sekel wrote. “Higher annual interest rates have allowed credit card companies to generate significantly higher Returns from other banking activities.”
Risk can also be a factor
The Consumer Bankers Association, a trade group representing credit card and other financial companies, disputed the CFPB’s characterization of profits and margins.
“The CFPB contends that increases in credit card interest rates over the past decade occurred against a backdrop of ‘relatively stable proportions of cardholders with subprime credit scores,'” CBA President and CEO Lindsey Johnson said in a written statement. This is simply not true.”
For example, according to CFPB data, about 42% of “deep subprime” borrowers had credit cards as of the end of 2022, the highest level since at least 2013 data. (“Deep Subprime” borrowers have the worst credit relative to other groups. Their credit score is below 580. )
“Lenders will only lend at rates that compensate them for the risk they take,” said Greg McBride, chief financial analyst at Bankrate.
The share of other “less than prime” borrowers (“near prime” and “subprime” consumers) holding credit cards has remained relatively flat over the past few years, according to the CFPB. (Their credit scores range from 580 to 659.)
McBride said credit card delinquencies could be another risk factor prompting card issuers to increase profit margins.
For example, “critical” credit card delinquency (payments 90 days or more past due) has increased across all age groups, a sign of financial stress. according to Federal Reserve Bank of New York.
Approximately 9.7% of credit card balances serious violation of law In the fourth quarter of 2023, the annual growth rate was 7.7%. Although it has increased in recent months, the proportion of seriously delinquent balances is now the same as in 2013.
Industry concentration may also play a role
However, industry concentration is another reason credit card companies are raising APRs, McBride said.
“Higher concentration of market share does tend to create greater pricing power,” he said. He added that this is often the case across a variety of industries, including airlines and cable companies.
Large lenders account for Majority of the credit card market: According to the CFPB, the top 10 credit card markets control 83% of the market.
There may be more consolidation soon: This week, Capital One Financial announced a $35.3 billion acquisition of Discover Financial. They are one of the largest credit card issuers in the country. The merger still requires regulatory approval.
How to Manage Credit Card Interest
There are ways for consumers to avoid higher interest rates altogether. For example, pay your credit card bill in full and on time each month, experts say.
In other words, don’t carry a scale. Such cardholders will not pay interest. (Importantly, the minimum monthly payment on a payment card does not equal paying your bill in full.)
Making full and on-time monthly payments is also a good way to improve your credit score, which may lead to consumers getting credit cards with lower interest rates, McBride said.
Consumers with good credit can also transfer existing balances to a new credit card and enjoy 0% APR, McBride said. He said some issuers are currently extending this 0% offer for up to 21 months, which “gives you a pretty long path to paying off your debt without being hit by high interest rates”.
