Credit Card Rates Are At Record High, Here's How to Sidestep Steep Interests

Credit card interest rates have hit a record high. The average annual percentage rate (APR) on credit cards has nearly doubled to 22.8 percent in 2023 from 12.9 percent in 2013. The average consumer paid a 22.8% interest rate on credit card balances at the end of last year, which is the highest since the Federal Reserve started tracking data in 1994.

"By some measures, credit cards have never been this expensive," wrote The Consumer Bankers Association's  Dan Martinez, senior credit card program manager.

The APRs began going upward in 2022, as the Feb raised its benchmark interest rate in hopes of tackling inflation. Interest rates on cards and other consumer loans generally move in sync with Fed policy, as per the barometer which is the "prime rate."

As per CFPB, credit card companies have also raised their average "APR margin" quite a lot.

"Since finance charges are typically part of the minimum amount due, this additional interest burden may push consumers into persistent debt, accruing more in interest and fees than they pay towards the principal each year — or even delinquency," the CFPB wrote. The APRD margin is the difference between the total APR and also the "Prime rate."

As per CFPB, it is the proxy for card issuers. Even these margins are at record highs with an average of 14.3% in 2023 which was up from 9.6% in 2013. Interest rate hikes by the Federal Reserve have only raised the prime rate and therefore the overall APR. Back in 2020, the Feds cut interest rates to a historic low. The prime rate at the time was around 3.3 percent. The prime rate has only soared since then. 

As per reports, rising APR margins have resulted in the total credit card interest rates going up in the last decade. However, The Consumer Bankers Association authors are now questioning the higher profits for the companies since issuers don't seem to be taking any risk by extending credit to more people with poor credit scores. Industry concentration has also played a role in the raised APR margins. 

"A greater concentration of market share does tend to produce greater pricing power,  That’s also generally the case for all sorts of industries, including airlines and cable companies," Greg McBride, chief financial analyst at Bankrate said. On top of that, Credit card delinquencies may also add to the cruise if card issuers’ rationale to raise margins, as per McBride, via CNBC.

"Serious" card delinquencies are payments that are 90 days or more overdue. This has only increased across all age groups in the past few months, as per the Federal Reserve Bank of New York.

About 9.7% of credit card balances were seriously delinquent in Q4 2023, which is up from 7.7%

Consumers can sidestep higher interest rates in a few ways. For example, you can try and pay credit card bills on time and also in full each month to avoid extra interest. This means, that not carrying a balance can help you with your interests.

Paying the bill in full recovery month is also a great way to boost your credit score which may also result in lower interest. Consumers with good credit scores may be able to transfer an existing balance to a new credit card with a 0% APR introductory offer.