Record-high credit card interest rates cost consumers $25 billion in 2023: report

According to one study, the average annual percentage rate (APR) on credit cards nearly doubled from 12.9% in 2013 to 22.8% in 2023, costing consumers about $25 billion in interest fees last year. new analysis By the Consumer Financial Protection Bureau (CFPB).

The average annual interest rate reached a record high late last year, according to a bureau analysis of data from the Federal Reserve, which began tracking it in 1994.

The jump in overall average annual interest rates comes as credit card debt has reached an all-time high. According to the report, U.S. credit card debt will exceed $1.1 trillion in the fourth quarter of 2023, and delinquencies are also increasing. new york federal reserve.

And for the second year in a row, 36% of Americans say they have more credit card debt than they have in emergency savings, according to Bankrate analysis. This is the highest percentage since the poll began in 2011.

“Because finance charges are typically part of the minimum payment, this additional interest burden forces consumers into permanent debt, incurring more interest and fees than they are paying on the principal each year. , and may even lead to delinquencies,” the CFPB wrote.

According to CFPB research, nearly half of the average APR increase over the past decade has been due to credit card issuers raising APR margins, with annual interest margins increasing across all credit tiers.

“The APR on most credit card accounts can be thought of as consisting of the prime rate and an APR margin,” the report explains. “The prime rate (the benchmark most banks use to set interest rates) is a good indicator of a bank’s cost of funding, which has increased in recent years. However, credit card issuers have We are increasing the annual interest rate significantly.”

Lending money to consumers involves risk, and the APR margin generates a profit that offsets that risk. According to a CFPB analysis of Federal Reserve Board data, the annual interest rate return, which had been hovering around 10%, began to rise around 2019 and reached a peak of 14.3% in 2023.

Interest rate hikes by the Federal Reserve also push up the prime rate, pushing up overall annual interest rates. When the Fed cut interest rates to historic lows in 2020, amid the pandemic, the prime rate was hovering around 3.3%. The prime rate soared to 8.5% last summer when the Fed raised interest rates to a 22-year high as part of its campaign to curb inflation, according to a CFPB analysis of central bank data.

The new report comes as banking giant Capital One announced plans to merge with credit card giant Discover on Monday, prompting criticism of the “dangerous” merger from some Democratic lawmakers and consumer advocates. It was announced in response.

“The merger of [Capital One] and [Discover] Sen. Elizabeth Warren (D-Mass.), a member of the Senate Banking Committee, wrote on X, the platform formerly known as Twitter.

“This Wall Street deal is dangerous and will harm working people. Regulators must stop it immediately,” she added.

Capital One CEO Richard Fairbank claimed the partnership would allow the bank to “build a payments network that can compete with the largest payment networks and payment companies.” This could be a boon as Congress considers legislation aimed at breaking up the Visa-Mastercard duopoly. ” By requiring more options in the credit card payment network market.

Credit card companies, including a coalition that includes Capital One, oppose Sen. Dick Durbin’s (D-Ill.) Credit Card Competition Act, which does not reduce costs for consumers and threatens to undermine popular rewards programs. However, there are vigorous protests against it.

Late last week, the CFPB also report They found that large credit card issuers offer worse terms and higher fees than their smaller competitors. According to the report, customers could save an average of $400 to $500 a year by going with a smaller bank that offers lower interest rates.

The Consumer Bankers Association (CBA), an industry group representing large U.S. banks, said the report was “misleading” and that its focus on APR meant that the It said it did not take into account differences in interest rates, fees and remuneration across products. .

However, the CFPB further highlights in a new report, “evidence of high levels of concentration in the consumer credit card market and practices that inhibit consumers’ ability to find alternatives to expensive credit card products.” concluded. These practices may help explain why credit card issuers have been able to support high interest rates to promote profits. ”