Interest rates on credit cards are so high these days that consumers with a $5,000 credit card balance could pay an extra $1,000 in interest over the course of a year, according to the Consumer Financial Protection Bureau.
The Fed has been aggressively raising interest rates this year in a bid to get inflation under control – and it has signaled that it’s not nearly done. At the same time, as the CFPB notes, some families are relying more on credit cards to keep up with the high cost of living.
“In the coming months, even more people may turn to their credit cards, as increasing prices for necessities like groceries and gas upend their budgets,” the consumer watchdog agency wrote in a blog post on Friday. “But this borrowing comes at a cost. With today’s interest rates, a person with a $5,000 credit card balance could pay an additional $1,000 in interest over the course of a year.”
More than 175 million Americans have at least one credit card and about half of active accounts carry a balance, according to the CFPB.
According to the CFPB, credit card interest rates have increased despite a stable share of riskier subprime cardholders, historically low prime rates and falling charge-off rates, a measure of accounts considered uncollectable after extreme delinquency. The prime rate is the interest rate banks charge their strongest corporate clients and it serves as a benchmark for consumer loans.
The CFPB found that last year, the spread between the prime rate and the average annual percentage rate (APR) on credit cards was at record highs – even as actual delinquencies and defaults tumbled to record lows.
Before the Great Recession, charge-off rates and credit card margins used to move in tandem, the CFPB said.
“But then, as the economy recovered, credit card companies did not decrease their prices accordingly, despite seemingly lower risk of default,” the CFPB said. “During the Covid-19 pandemic, issuers’ margins and charge-off rates diverged even further.”
In a likely sign of tougher scrutiny to come, the CFPB called out how expensive it is to borrow via a credit card – even though consumers are, by and large, keeping up with their monthly bills. The consumer watchdog agency described this as an “apparent mismatch” and suggested the high rates may help explain the credit card industry’s “outsized profits.”
The CFPB said it plans to study whether anti-competitive practices in an industry “dominated by a few key players” have jacked up corporate profits at the expense of cardholders, or if this can be explained by the popularity of rewards programs.
In a statement, a spokesperson for the American Bankers Association, an industry trade group, accused the CFPB of a “troubling trend” of “cherry-picking information and painting an incomplete picture of the vibrant and highly competitive credit card market.”
The ABA noted that a near-record share of cardholders are paying off their balance in full in recent months, avoiding interest charges.
“Americans value the convenience, safety and security they get from their credit cards, and they also appreciate the transparency of credit card pricing which is mandated by the government,” the ABA spokesperson said. “As the economy evolves, card issuers will work with their customers to help them navigate the uncertainties ahead, just as they did during the pandemic and prior periods of financial stress.”
“We take this threat [by the CFPB] seriously,” Jaret Seiberg, analyst at Cowen Washington Research Group, wrote in a note to clients on Monday.
Seiberg noted that even though the CFPB does not have the authority to cap interest rates, the agency has effectively used public pressure in the past to persuade banks to change their policies.
“Banks may find it better to cut interest rates than engage in a public fight with the agency,” Seiberg said.