Consumer Protection Agency investigates record high credit card rates
Credit cards are one of the easiest and most common ways to borrow money – but also one of the most expensive.
Now the Consumer Financial Protection Bureau is investigating how much banks charge in credit card interest.
Amid rising inflation, consumers have increasingly turned to credit cards to make ends meet, prompting the federal agency created in the wake of the 2008 financial crisis to investigate.
“Consumer confidence in credit cards as a source of credit warrants a closer look at what is driving interest rates as credit card market profitability increases,” Margaret Seikel, financial analyst at the CFPB, wrote in a recent article blog entry.
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“More people may turn to their credit cards in the coming months as rising prices for necessities like groceries and gas throw their budgets upside down,” CFPB’s Seikel said.
“But this borrowing comes at a price,” she added. At current interest rates, a person with a $5,000 credit card balance would pay $1,000 in interest on these purchases over a year.
Ted Rossman, Senior Industry Analyst at CreditCards.com, says that if your APR is more than 20% and you make the minimum payments each month, this scenario is very plausible.
According to TransUnion, the number of people with credit cards and personal loans has already reached new highs in the second quarter of 2022 Insights into the credit industry published earlier this month.
Credit card balances also rose 13% in the second quarter, the largest year-over-year increase in more than 20 years, according to a separate report from the Federal Reserve Bank of New York.
At the same time, annual percentage rates are averaging just under 18% — which Rossman says is an all-time record.
Since most credit cards have a variable APR, there is a direct link to the Federal Reserve’s benchmark. When the federal funds rate rises, so does the federal funds rate, and credit card rates follow suit.
But even when the Fed cut its interest rate near zero early in the pandemic and the cost of borrowing for other products fell significantly, “credit card rates have remained relatively high,” Seikel said.
Now, the spread between the policy rate and the average annual percentage rate on credit card loans is at record highs, even as arrears are near record lows, the agency also found.
“The apparent mismatch between credit card rates and the risk and cost of lending could explain some of the markets’ outsized gains,” Seikel said.
And credit card rates will only go up from here: The Fed expects more rate hikes to curb inflation.
How the CFPB can push banks to lower credit card fees
“We take this threat seriously,” said Jaret Seiberg, financial services analyst at Cowen Washington Research Group.
“I think that’s going to be the big focus for the CFPB this fall,” he said. “Politically, it works because nobody likes to pay high credit card interest rates.”
Although the CFPB does not have the authority to cap interest rates, banks may find it better to lower interest rates than publicly feud with the agency, Seiberg said. CFPB director Rohit Chopra used a similar strategy to get financial institutions to do it Lower interest on arrears, overdraft fees and other excessive fees.
“He’s a master of the bully’s pulpit,” said Seiberg.
If the CFPB goes ahead with rulemaking, the agency could seek to limit spreads between the APR and the policy rate.
However, such policies could have unintended consequences, Seiberg added. Limiting bank revenues could force issuers to tighten their lending standards, causing some lower-income consumers to lose access to credit card accounts.
“Banks are for-profit businesses and they will not offer products where they lose money,” he said.
“Rather than fight the system, it’s better to let the system work for you,” Rossman advised. “Pay in full,” he said, “and make the interest rate a moot point.”
“If you’re in debt, get a zero percent transfer card and avoid adding to the balance until you pay it off,” Rossman said. Cards that offer 15, 18, and even 21 months without interest are considered the best tool for paying off debt and saving hundreds or thousands of dollars in interest.
“Divide your debt by the number of months and try to stick to that,” Rossman said.