Consumer watchdog to investigate record 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 looking at how much interest banks charge on credit cards.

With inflation soaring, 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 .

“Consumers’ reliance on credit cards as a source of borrowing warrants closer examination of what drives interest rates as the profitability of the credit card market increases,” wrote financial analyst Margaret Seikel. at the CFPB, in a recent blog post.

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“In the coming months, even more people may be turning to their credit cards as rising prices for necessities like groceries and gas upend their budgets,” CFPB’s Seikel said.

“But this loan has a cost,” she added. At current interest rates, someone with a credit card balance of $5,000 would pay $1,000 in interest on those purchases over a year.

Ted Rossman, senior industry analyst at, says this scenario is very plausible if your annual percentage rate is above 20% and you make the minimum payments each month.

Consumer reliance on credit cards as a source of borrowing warrants closer examination of what drives interest rates as the profitability of the credit card market increases.

Margaret Sekel

financial analyst at Consumer Financial Protection Bureau

Card balances, APRs are up

The number of people with credit cards and personal loans has already reached new highs in the second quarter of 2022, according to the latest report from TransUnion credit industry report released earlier this month.

Credit card balances also jumped 13% in the second quarter, the biggest 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, APRs are just under 18%, on average, which is an all-time high, according to Rossman.

Since most credit cards have a variable APR, there is a direct link to the Federal Reserve benchmark. As the federal funds rate rises, the prime rate also rises, and credit card rates follow.

But even when the Fed cut its benchmark rate near zero at the start of the pandemic and the cost of borrowing for other products fell significantly, “credit card rates remained relatively high,” he said. Seikel.

Now, the spread between the prime rate and the average APR on credit card loans is at record highs despite delinquencies near record highs, the agency also noted.

“The apparent mismatch between credit card interest rates and the risk and cost of lending may explain some of the markets’ outsized profits,” Seikel said.

And credit card rates will only rise from here: the Fed is planning further interest rate hikes as it seeks to rein in inflation.

How the CFPB can push banks to cut credit card rates

“We take this threat seriously,” said Jaret Seiberg, financial services analyst at Cowen Washington Research Group.

“I think that will be the big focus for the CFPB this fall,” he said. “Politically it works because nobody likes paying high interest rates on credit cards.”

Although the CFPB does not have the power to cap interest rates, banks might find it better to cut rates rather than engage in a public fight with the agency, Seiberg said. CFPB Director Rohit Chopra has used a similar strategy to get financial institutions to reduce late fees, overdraft fees and other excessive charges.

“He’s a master bully pulpit,” Seiberg said.

If the CFPB proceeds with a regulation, the agency could try to limit the discrepancies between the APR and the prime rate.

But there can be unintended consequences to such a policy, Seiberg added. Limiting bank revenues could force issuers to tighten their lending standards, which would cause some low-income consumers to lose access to credit card accounts.

“Banks are for-profit businesses and they’re not going to offer products where they lose money,” he said.

How to Pay Off Credit Card Debt When Interest Rates Rise

“Rather than fighting the system, the best approach is to make the system work for you,” Rossman advised. “Pay in full,” he said, “which makes the interest rate questionable.”

“If you’re in debt, get a zero percent balance transfer card and avoid adding anything to the balance until you pay it off,” Rossman said. Cards offering 15, 18 and even 21 months interest free are considered the best tool to pay off debt and save hundreds or thousands of dollars in interest.

“Divide what you owe by the number of months and try to stick to it,” Rossman said.

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