By Tom Ozimek
Interest rates on retail credit cards have soared to their highest levels on record, according to a new report, which comes towards what seems to be the tail end of a rapid rate-hiking cycle by the Federal Reserve—which warned recently it’s ready to raise rates further if inflation data continue to come in hot.
The retail credit card rate has increased to an average of 28.93 percent, according to an Oct. 23 report from Bankrate, which notes that this is a record high.
In 2022, that rate was 26.72 percent, while in 2021, it stood at 24.35 percent.
While the average annual percentage rate (APR) on all types of credit cards is lower, it’s still a steep 21.9 percent.
“We used to see 30 percent as the high end for retail credit card APRs,” Ted Rossman, Bankrate’s senior industry analyst, said in a statement. “In fact, 29.99 percent was an artificial barrier that few dared to cross—for psychological reasons, mostly. But the market has blown past that threshold given the Fed’s aggressive series of interest rate hikes over the past year and a half.”
In a bid to quash soaring inflation, the Federal Reserve started raising interest rates in March 2022 from near zero to the current level of 5.25-5.5 percent—the fastest pace since the 1980s.
While the Fed only changes a single rate—the federal funds rate—it has a direct impact on the interest consumers pay for all types of variable-rate loans.
Meanwhile, Federal Reserve Chair Jerome Powell recently warned that if inflation data continues to come in higher than expected, the central bank is prepared to raise rates further.
Americans Paying Record-High Credit Card Interest and Fees
The Fed’s rapid rate hikes last year are the reason that American consumers paid a record-setting amount in 2022 in credit card interest and fees.
“Americans paid $130 billion in interest and fees on their credit cards,” Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra said in an Oct. 25 statement that accompanied the release of a report on key developments and consumer risks in the credit card market.
The CFPB report found that, as the U.S. central bank hiked rates sharply in 2022, variable-rate loan costs went up and credit card companies charged consumers over $105 billion in interest and more than $25 billion in fees. This is an all-time high.
“Federal Reserve rate increases triggered upward repricing on most general purpose cards, and issuers continue to price well above the prime rate, with an average annual percentage rate (APR) margin of 15.4 percentage points,” the CFPB report states.
With a record $1 trillion in credit card debt, Americans face a growing risk of persistent indebtedness, the agency warned.
“We find one in ten general purpose accounts are charged more in interest and fees than they pay toward the principal each year, indicating a pattern of persistent indebtedness that could become increasingly difficult for some consumers to escape,” the report warns.
With credit card interest rates at or near record highs, more cardholders may struggle to pay their credit card bills on time. This is especially the case with retail credit cards, which often offer special deferred interest promotions that can lead to cardholders getting hit with unexpected interest fees if they don’t pay their balances in full before the promotional period ends.
Further, Bankrate analysts found that 16 retail credit cards (13 store-only and 3 co-branded offerings) charge balance-carrying consumers a whopping 32.24 percent interest rate.
“Many retail credit cards now charge all of their balance-carrying customers rates in line with what we used to think of as figures reserved solely for a deep subprime audience,” Mr. Rossman said, with the report noting that the annual percentage interest rates on retail credit cards have put them in subprime territory.
Meanwhile, recent data from the New York Federal Reserve shows that credit card debt delinquency transition rates have jumped to an 11-year high as more Americans miss payments.
Auto loan default rates in the United States have also surged, hitting their highest levels on record.
“Regional bank carnage and recent rise in auto delinquencies to long-term historical highs indicate U.S. economy slowing significantly. Recession in fourth quarter,” Bill Gross, bond trader and founder of Pacific Investment Management Company, said in a post on X.
Lawmakers Take Aim
Some lawmakers and federal regulators have called for credit card companies to put caps on rates and to lower fees as high interest rates push debt levels higher.
Sen. Josh Hawley (R-Mo.) introduced a bill in September to place a cap on credit card rates due to “higher financial burdens” that are being carried by working Americans.
“Americans are being crushed under the weight of record credit card debt—and the biggest banks are just getting richer,” the Republican lawmaker said in a statement. “The government was quick to bail out the banks just this spring but has ignored working people struggling to get ahead. Capping the maximum credit card interest rate is fair, common-sense, and gives the working class a chance.”
Earlier this year, four senators introduced the Credit Card Competition Act, which would aim to reduce some card transaction fees that are passed on to consumers. They include Sens. Dick Durbin (D-Ill.), J.D. Vance (R-Ohio), Peter Welch (D-Vt.), and Roger Marshall (R-Kan.).
Jack Phillips and Reuters contributed to this report.