Credit card interest rates are at record highs

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Credit card interest rates have ballooned to record highs in recent years — and the growing portion of the formula that generates profit for card issuers is partly to blame, according to a new analysis by the Consumer Financial Protection Bureau.

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

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

“By some measures, credit cards have never been this expensive,” wrote CFPB’s Dan Martinez, senior credit card program manager, and financial analyst Margaret Seikel.

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Credit card issuers have raised ‘APR margins’

Credit card APRs began moving sharply higher in 2022 as the Fed raised its benchmark interest rate to tame inflation. Interest rates on credit cards — and other consumer loans — generally move in tandem with Fed policy, according to a barometer known as the “prime rate.”

However, credit card companies have also simultaneously raised their average “APR margin,” according to the CFPB.

APR margin is the difference between the total APR and the “prime rate.” It’s a proxy for card issuers’ profits commensurate with their lending risk, the CFPB said.

Those margins are at record highs. They averaged 14.3% in 2023, up from 9.6% in 2013, according to the watchdog’s analysis, issued Thursday.

Almost half the increase in total credit card interest rates in the past decade is due to issuers raising their APR margins, the analysis said.

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However, the CFPB authors questioned if those higher profits were justified since issuers don’t seem to be taking more risk by extending credit to more consumers with lower credit scores, for example.

The share of consumers with “subprime” credit scores who hold a credit card has been “relatively stable,” they said.

Major credit card issuers got $25 billion in extra interest by raising their average APR margin over the past 10 years, the CFPB estimated. The average consumer with a $5,300 balance across credit cards would have paid an extra $250 in 2023 due to this increase, the agency said.

“Increases to the average APR margin … have fueled issuers’ profitability for the past decade,” Martinez and Seikel wrote. “Higher APR margins have allowed credit card companies to generate returns that are significantly higher than other bank activities.”

Risk may be a factor, too

The Consumer Bankers Association, a trade group that represents credit card and other financial companies, disputed the CFPB’s characterization of margins and profits.

“The CFPB claims that rising credit card interest rates over the…

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Credit card interest rates are at record highs

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