US Credit Card Interest Rates Reach Highest Mark in 25 Years

ElitePersonalFinance
Last Update: January 12, 2021 Financial News

Even as the U.S. Federal Reserve ponders more interest rates cut, credit card borrowers cannot see the savings. 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 faster, and the spread between the Federal Funds Rate and credit card interest rates continues to widen.

What Caused 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 to compensate for borrowers’ perceived default risk.

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. Financial institutions can use new fees or even fee increases 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 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 roll over 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.

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