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Credit-card issuers have been padding their interest rates, causing cardholders to pay inflated borrowing costs, according to new research from federal regulators.<\/p>\n
Though credit-card annual percentage rates have climbed since the Federal Reserve began hiking its benchmark interest rates in 2022, a new analysis from the Consumer Financial Protection Bureau says that\u2019s just part of the reason why it\u2019s more expensive to have unpaid credit-card debt.<\/p>\n
APRs, the annual percentage rate that credit-card issuers charge on a balance, are also growing because they keep rising higher above a widely-used benchmark rate, according to a Thursday blog post<\/a> from CFPB researchers.<\/p>\n It was happening long before the Fed began raising rates, but 2023 set a new record, the researchers wrote. The spread has never been wider between the average APR for a credit card with a balance and the baseline rate, which is known as the prime rate, they said. Most banks use the prime rate to set their rates.<\/p>\n Cardholders with a balance paid over $250 last year just because of that widening margin, the researchers estimated. They modeled it on the costs for a $5,300 balance. Average credit-card balances in 2023\u2019s third quarter surpassed $6,000<\/a>, according to TransUnion Meanwhile, major card-issuers pulled in an extra $25 billion in interest revenue last year due to the widening margin, the agency said.<\/p>\n Americans finished 2023 with $1.13 trillion in credit-card debt <\/a>and card delinquency rates at their highest point in more than a decade. Over one-third of U.S. households now have more credit-card debt than savings, <\/a>a new survey found. <\/p>\n The CFPB researchers looked at Federal Reserve data <\/a>on average APRs for accounts carrying a balance. They also looked at the prime rate, which is typically three percentage points<\/a> above the federal funds rate. The Fed\u2019s rate sits at a 5.25% to 5.5% target range for now<\/a>.<\/p>\n In the fourth quarter, credit cards with a balance had an average 22.8% APR. That\u2019s a 14-percentage-point margin on top of the current 8.5% prime rate. Ten years ago, cards with a balance had an almost 13% APR when the prime rate was 3.3%. That\u2019s a 9.6-percentage-point spread.<\/p>\n At a time when consumer advocates are already wary of companies\u2019 roles behind rising costs<\/a>, the CFPB analysis stoked skepticism. Major credit-card issuers are more likely to charge higher APRs,<\/a> according to a different CFPB report last week.<\/p>\n \u201cThere\u2019s no reason other than greed for credit-card company CEOs to price-gouge Americans with interest rates that vastly outpace federal rates,\u201d said Liz Zelnick, director of the economic security and corporate-power program at Accountable.US.<\/p>\n The look at APR margins comes days after the news of Capital One\u2019s But a banking group pushed back on the idea that card issuers were running up rates just because they could. The Consumer Bankers Association said the research overlooked other CFPB reports<\/a> that note a growing share of cardholders with very low credit scores.<\/p>\n Lower credit scores can push a cardholder\u2019s APR higher<\/a> because lenders tend to see more risk extending them a line of credit.<\/p>\n \u201cThe CFPB continues to extend beyond its consumer protection authority to pose questions about setting pricing and profits. At best, those are questions about politics \u2014 not bank policy,\u201d Lindsey Johnson, the organization\u2019s president and CEO said in a statement.<\/p>\n
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\n plans to buy <\/a>Discover
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\n If approved by regulators, the deal would create the largest credit-card company by loan volume. Critics worry Capital One will have too much clout and capacity to increase APRs<\/a> on its cards. Capital One did not immediately respond to a request for comment.<\/p>\nHow credit-card users can save money despite high APRs<\/h2>\n