In recent years, credit card interest rates have skyrocketed to record highs, with the average consumer paying a 22.8% interest rate on their credit card balance at the end of 2023. This is the highest it has been since the Federal Reserve started tracking data in 1994. Interest charges, expressed as an annual percentage rate, have increased by about 10 points over the past decade, rising from 12.9%. Not only are interest rates on the rise, but total credit card debt and average balances are also hitting record highs.

A new analysis by the Consumer Financial Protection Bureau suggests that part of the reason for the surge in credit card interest rates is the growing portion of the formula that generates profit for card issuers. The agency found that credit card companies have significantly increased their average “APR margin” over the past decade. The APR margin is the difference between the total APR and the “prime rate” and serves as a proxy for card issuers’ profits relative to their lending risk. This margin has reached record highs, averaging 14.3% in 2023, up from 9.6% in 2013.

While credit card companies have been reaping the benefits of these higher APR margins, the CFPB analysis questions whether these profits are justified. Despite the increase in margins, the share of consumers with “subprime” credit scores holding a credit card has remained relatively stable. This raises concerns about whether card issuers are taking on more risk by extending credit to consumers with lower credit scores. The analysis estimates that major credit card issuers earned an extra $25 billion in interest by raising their average APR margin over the past decade.

Another risk factor that may be driving card issuers to raise margins is the increase in credit card delinquencies. According to the Federal Reserve Bank of New York, serious card delinquencies have been on the rise across all age groups, signaling financial stress among consumers. About 9.7% of credit card balances were seriously delinquent in Q4 2023, up from 7.7% a year earlier. This trend may have further incentivized card companies to raise APR margins to protect against potential losses.

Industry concentration is another factor that may have led credit card companies to raise APR margins. The CFPB data reveals that the 10 largest lenders control 83% of the credit card market. This concentration of market share gives these companies greater pricing power, allowing them to set higher interest rates. Similar trends of industry consolidation and pricing power can be seen in other sectors, such as airlines and cable companies.

Despite the surge in credit card interest rates, consumers can still take steps to avoid paying exorbitant interest charges. One effective strategy is to pay credit card bills on time and in full each month. By not carrying a balance, cardholders can avoid paying any interest. Additionally, paying in full and on time can help raise one’s credit score, making it easier to qualify for lower-interest-rate cards in the future. Consumers with good credit may also consider transferring an existing balance to a new credit card with a 0% APR introductory offer, providing a reprieve from high interest rates for a limited period.

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