US Credit Card Interest Rates Reach Highest Mark In 25 Years
Financial News

US Credit Card Interest Rates Reach Highest Mark In 25 Years

EPF September 4, 2019

Even as the U.S. Federal Reserve ponders more interest rates cuts, the savings are not being seen by credit cards borrowers. Federal Reserve data – as of May 2019 – shows the average credit card interest rate for accounts assessed interest is 17.14%. The figure is the highest since the central bank began tallying the results.

So how did we get here?

Well, as the Fed began its rate-rising cycle in late 2015, credit card issuers followed suit by raising their credit card interest rates. However, credit card issuers began moving at a faster clip and the spread between the Federal Funds Rate and credit card interest rates continues to widen.

What’s Causing The Divergence?

In 2009, the Credit Card Accountability, Responsibility and Disclosure Act forbid issuers from raising interest rates on existing credit card balances. Thus, issuers began to charge higher interest rates at the outset as a way to compensate for the perceived default risk of borrowers.

Consumer behavior also plays a role. Rather than focus on the cost of borrowing, consumers usually pay more attention to the rewards or cashback features inherent with the card. As such, perks often take precedent over interest rates.

Another factor is the prime rate. Credit card issuers add a premium to the fluctuating figure as a way to determine the finalized rate. And while the prime rate moves in lock-step with the Federal Funds Rate, it’s not the best gauge of future credit card interest rates. Researchers found that credit card interest rates often increase more than three times the prime rate during the same period.

Additional charges also deserve attention. New fees or even fee increases can be used by financial institutions to offset a decline in the Federal Funds Rate. As such, interest savings don’t show up on your bottom line.

How Much Money Are The Banks Making?

According to the Federal Deposit Insurance Corporation (FDIC), member institutions have a combined $859.946 billion in credit card receivables on their balance sheets as of 2019:Q1. These receivables represent outstanding credit card loans that institutions expect to recoup or earn interest on in the future.

Data from the Consumer Financial Protection Bureau’s (CFPB) Consumer Credit Card Market study also found that 29% of credit card balances are paid-in-full each month. Analyzing from the opposite perspective, the findings imply that 71% of balances rollover each month and incur interest charges. And with the average credit card interest rate currently sitting at 17.14%, FDIC-insured institutions stand to rake in roughly $104.7 billion in interest in 2019.

A Growing Problem?

In our study of U.S. credit card debt, we found that borrowing has increased more than 42% since the lows of 2011.

Have a look:

Year:Total Credit Card Debt (Billions):

And as consumers continue to increase their appetite for credit card debt, it’s clear the product will remain a staple in financial institutions portfolios.

Elite Personal Finance

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