The real reason for record-high credit card rates? It's not what you think.
Daniel de Visé, USA TODAY
Updated 5 min read
Interest rates are coming down, but credit card rates remain stubbornly high.
The average credit card rate is 20.51%, Bankrate reports. That’s a hair below the all-time record, 20.79%, set in August.
Card rates are so high, in part, because of the Federal Reserve. The central bank raised rates dramatically in 2022 and 2023 to fight surging inflation.
But that’s not the whole reason. Credit card rates are higher now than they have ever been, including times when other interest rates were higher than they are today.
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The real reason why credit card rates are so high
The hidden reason for sky-high card rates, credit experts say, is that card companies are charging record-high “margins.” That’s interest the card issuer charges above the prime lending rate.
“You can think of this as a profit margin,” said Odysseas Papadimitriou, CEO of WalletHub.
Credit card margins average 14.9%, as of August, WalletHub reports. In other words, the average cardholder pays roughly 15% in annual interest on top of the prime rate. The prime rate is, in theory, the rate lenders charge their most creditworthy customers.
Card margins have never been so high. The average margin was 13.2% in August 2020 and 10.7% in August 2015, according to WalletHub.
Much has been written about the effect of the Fed’s interest-rate campaign on card rates. But card rates are steeper now than ever before, including times when benchmark interest rates were higher than today.
For instance, in mid-2000, average credit card rates floated between 15% and 16%, according to WalletHub. That’s well below 2024 rates.
But the prime lending rate stood at 9.5% in mid-2000. Today, the prime rate is 8%.
Credit card margins have been on the rise since the Great Recession.
Credit card margins have risen notably since the Great Recession
Credit card margins have risen markedly since the Great Recession, a span of years that saw the benchmark federal funds rate, set by the Fed, hover near zero.
“Over all the years of these zero-percent policies, the banks used those policies to jack up the margin between their cost for funds and how much they charge consumers,” Papadimitriou said. “That margin, over the years, has kept increasing and increasing.”
Card companies cite several legitimate reasons for raising their margins, according to industry experts.
For one thing, card issuers have to cover their costs when cardholders don’t make their payments. The credit-card delinquency rate is about 3.25%, its highest level since 2011. The rate represents overdue card balances.
“Card issuers are tacking on some additional profit margin to compensate for the fact that some cardholders won't pay them back,” said Ted Rossman, senior industry analyst at Bankrate.
Card margins have risen, too, because of “costs related to overhead, fraud prevention, and compliance,” said the American Financial Services Association, the trade association for card companies, in a statement to USA TODAY.
“Over the last few years, overhead costs – the cost of labor, for example – have gone up in all industries, including financial services,” the association said. “Compliance costs have risen due to heavy government regulation. Increasingly sophisticated fraudsters have driven up the cost of fraud prevention.”
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Higher margins make up half the increase in card rates
Higher margins account for about half of the increase in card rates over the last decade, according to an analysis published in February by the federal Consumer Financial Protection Bureau.
Like WalletHub, the federal watchdog found that card-company margins have floated upward over the years, from an average of 9.6% in 2013 to 14.3% in 2023. The cumulative increase translates to at least $250 in extra interest payments for the average card customer in 2023.
Higher margins “have fueled issuers’ profitability for the past decade,” the consumer agency reported. “Higher APR margins have allowed credit card companies to generate returns that are significantly higher than other bank activities.”
Both card rates and card margins have peaked in recent years.
In 2022 and 2023, the Fed hiked the federal funds rate by more than five percentage points, leaving it at a peak range of 5.25% to 5.5%.
Credit card rates rose even faster. Between February 2022 and August 2024, the average card rate rose more than seven points, from 14.6% to 21.8%, according to WalletHub. (WalletHub and Bankrate quote slightly different rates.)
In September, the Fed cut the federal funds rate by half a point, setting it to a range of 4.75% to 5%. Card rates inched lower, but not by much.
In fact, some lenders responded to the rate cut by simultaneously raising rates on new cards, the consumer agency said in a statement to USA TODAY.
Many cardholders are maxed out
Record-high card rates have many cardholders in a bind.
One in five cardholders has maxed out a credit card since the Fed began raising rates, according to an October report from Bankrate, the personal finance site.
A maxed-out credit card is a red flag on a consumer’s credit report. “And the longer this goes on, the greater hit your credit score could take,” said Sarah Foster, an economic analyst at Bankrate.
Half of cardholders carry a balance from month to month, rather than pay it off, according to Bankrate.
The nation’s total credit card debt stands at $1.3 trillion, as of August, according to WalletHub. The average household holds $10,805 in credit-card debt. Both figures are at or near all-time highs.
More than half of credit-card customers are now “financially unhealthy,” J.D. Power reported in August. That measure, drawn from surveys of 38,852 consumers, denotes cardholders who are not meeting their monthly payment obligations and do not have a long-term financial plan in place.
Only one-quarter of cardholders surveyed by J.D. Power said the perks on their cards, including miles and other rewards, are improving their lifestyle.
“We’re seeing satisfaction drop for those cardholders who are revolving debt,” rather than paying it off, said John Cabell, managing director, payments intelligence at the consumer research firm. “It’s costing more to own the card.”
