Credit cards

More and more Americans rely on credit cards. It could be very expensive

Credit card interest rates are so high these days that consumers with a credit card balance of $5,000 could pay an extra $1,000 in interest over the course of a year, according to the Consumer Financial Protection Bureau. The Fed has aggressively raised interest rates this year. with the aim of controlling inflation – and he has signaled that it is not close to being done. At the same time, as the CFPB notes, some families rely more on credit cards to meet the high cost of living. “In the coming months, even more people could turn to their credit cards as the prices of basic necessities like groceries and gas upend their budgets,” the watchdog agency wrote on Friday. consumers in a blog post. “But that borrowing comes at a cost. At today’s interest rates, someone with a credit card balance of $5,000 could pay an additional $1,000 in interest over the course of a year.” More than 175 million Americans have at least one credit card and about half of active accounts have a balance, according to the CFPB. According to the CFPB, credit card interest rates have risen despite a stable share of riskier subprime cardholders, historically low prime rates and falling charge-off rates, a measure of accounts deemed uncollectible after an extreme delinquency. The prime rate is the interest rate that banks charge their strongest corporate clients and is used as a benchmark for consumer loans. records – even as delinquencies and actual delinquencies fell to record lows. Before the Great Recession, charge rates and spreads on credit cards moved in tandem, the CFPB said. not lower their prices accordingly, despite an apparently lower risk of default,” the CFPB said. “During the Covid-19 pandemic, issuer margins and charge rates have diverged further.” In a likely sign of further scrutiny to come, the CFPB has called out how expensive it is to borrow via credit card – even though consumers are, on the whole, to meet their monthly bills . The consumer watchdog described it as an “apparent mismatch” and suggested the high rates could help explain the credit card industry’s “outsized profits”. The CFPB said it plans to investigate whether anti-competitive practices in an industry ‘dominated by a few key players’ have increased corporate profits at the expense of cardholders, or whether it can be explained by the popularity of programs of rewards. In a statement, a spokesperson for the American Bankers Association, an industry trade group, accused the CFPB of a tendency to “gather information and paint an incomplete picture of the dynamic and highly competitive market for credit cards.” “Americans appreciate the convenience, safety, and security they get from their credit cards, and they also appreciate the transparency of credit card pricing that is mandated by the government,” said the ABA. said the pokesperson. “As the economy evolves, card issuers will work with their customers to help them weather the uncertainties ahead, just as they have done during the pandemic and previous periods of financial strains.” “We take this threat seriously,” Jaret Seiberg, an analyst at Cowen Washington Research Group, wrote in a note to clients Monday. Seiberg noted that while the CFPB does not have the power to cap r interest rates, the agency has effectively used public pressure in the past to persuade banks to change their policies. may find it preferable to cut interest rates rather than engage in a public fight with the agency,” Seiberg said.

Credit card interest rates are so high these days that consumers with a credit card balance of $5,000 could pay an additional $1,000 in interest over the course of a year, according to the Consumer Financial Protection Bureau.

The Fed has been aggressively raising interest rates this year in an effort to get inflation under control – and it’s signaled it’s nowhere near doing so. At the same time, as the CFPB notes, some families rely more on credit cards to meet the high cost of living.

“In the coming months, even more people may turn to their credit cards as rising prices for necessities like groceries and gas upend their budgets,” the agency wrote on Friday. consumer monitoring in a blog post. “But that borrowing comes at a cost. At today’s interest rates, someone with a credit card balance of $5,000 could pay an additional $1,000 in interest over the course of a year.”

More than 175 million Americans have at least one credit card and about half of active accounts carry a balance, according to the CFPB.

CFPB says credit card interest rates have risen despite a stable share of riskier subprime cardholders, historically low prime rates and falling charge-off rates, a measure of accounts deemed uncollectible after a delay extreme payment. The prime rate is the interest rate that banks charge their strongest corporate clients and is used as a benchmark for consumer loans.

The CFPB found that last year the spread between the prime rate and the average annual percentage rate (APR) on credit cards was at record lows – even as delinquencies and actual defaults fell at record levels.

Before the Great Recession, charge rates and spreads on credit cards moved in tandem, the CFPB said.

“But then, as the economy recovered, credit card companies did not lower prices accordingly, despite seemingly lower risk of default,” the CFPB said. “During the Covid-19 pandemic, issuer margins and charge rates have diverged further.”

Likely a sign of further scrutiny to come, the CFPB has pointed out how expensive it is to borrow via credit card – even if consumers are, by and large, up to their monthly bills. The consumer watchdog described it as an “apparent mismatch” and suggested the high rates could help explain the credit card industry’s “outsized profits”.

The CFPB said it plans to investigate whether anti-competitive practices in an industry “dominated by a few key players” have driven up corporate profits at the expense of cardholders, or whether it can be explained by the popularity of rewards programs.

In a statement, a spokesperson for the American Bankers Association, an industry trade group, accused the CFPB of a “disturbing pattern” of “gathering information and painting an incomplete picture of the dynamic market and highly competitive credit cards”.

The ABA noted that a near-record share of cardholders were paying off their balances in full in recent months, avoiding interest charges.

“Americans appreciate the convenience, safety, and security they get from their credit cards, and they also appreciate the transparency of credit card pricing that is mandated by the government,” the spokesperson said. over there. “As the economy evolves, card issuers will work with their customers to help them weather the uncertainties ahead, just as they have done during the pandemic and previous periods of financial stress.”

“We take this threat [by the CFPB] seriously,” Cowen Washington Research Group analyst Jaret Seiberg wrote in a note to clients on Monday.

Seiberg noted that while the CFPB does not have the power to cap interest rates, the agency has actually used public pressure in the past to persuade banks to change their policies.

“Banks might find it preferable to cut interest rates rather than engage in a public fight with the agency,” Seiberg said.