Americans paid a staggering $130 billion in credit card interest and fees due to increased Federal Reserve rates.
A Record-Breaking Year for Credit Card Interest and Fees
A new report to Congress reveals that as the Federal Reserve raised interest rates at an unprecedented pace last year, U.S. consumers faced a staggering amount of credit card interest and fees.
The report, released on Oct. 25 by the Consumer Financial Protection Bureau (CFPB), tracks key developments and consumer risks in the credit card market.
The report found that as the Federal Reserve sharply increased rates in 2022, variable-rate loan costs surged, resulting in credit card companies charging consumers over $105 billion in interest and more than $25 billion in fees.
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“Americans paid $130 billion in interest and fees on their credit cards,” stated CFPB Director Rohit Chopra, emphasizing that this figure is an all-time high.
The CFPB attributes the record-breaking credit card interest payments to the sharp increase in the benchmark interest rate set by the U.S. central bank in response to soaring inflation.
In an effort to combat rising prices, the Federal Reserve began raising interest rates in March 2022, reaching a current level of 5.25-5.5 percent—the fastest pace since the 1980s.
Although the Fed only adjusts a single rate, the federal funds rate, it directly impacts the interest consumers pay on various variable-rate loans.
The CFPB report indicates that “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.”
Meanwhile, a new report from Bankrate reveals that interest rates on retail credit cards have skyrocketed to their highest levels ever, with the blame falling on Fed rate hikes.
Credit Card Interest Rates Reach New Heights
According to the latest data from Bankrate, the average retail credit card now charges a record-high interest rate of 28.93 percent.
Four store-only retail credit cards—the Academy Sports + Outdoors Credit Card, Burlington Credit Card, Good Sam Rewards Credit Card, and Michaels Credit Card—all charge interest rates over 33 percent.
“We used to see 30 percent as the upper limit for retail credit card APRs,” said Ted Rossman, Bankrate’s senior industry analyst. “But the market has surpassed that threshold due to the Fed’s aggressive series of interest rate hikes over the past year and a half.”
Retail credit cards often entice customers with special deferred interest promotions, but Bankrate analysts caution that this poses a hidden threat. If balances are not paid in full before the promotional period ends, consumers may face unexpected interest fees.
The Bankrate analysis reveals that 16 retail credit cards (13 store-only and 3 co-branded offerings) charge balance-carrying consumers an astonishing 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,” noted Mr. Rossman, with the report highlighting that retail credit card interest rates have entered subprime territory.
A Disturbing Trend of Persistent Indebtedness
With total outstanding credit card debt surpassing trillion for the first time ever, the CFPB report warns that many cardholders are sinking deeper into debt.
“With the average minimum payment due increasing to over $100 on revolving general-purpose accounts in 2022, more users are incurring late fees and facing higher costs on growing debt,” states the report.
CFPB analysts reveal that one in ten general-purpose credit card accounts accrue more interest and fees than they pay towards the principal, indicating a “pattern of persistent indebtedness that could become increasingly difficult for some consumers to escape.”
Despite pandemic-era stimulus payments helping some cardholders reduce debt, those funds have long been depleted, and the number of Americans with credit cards facing persistent debt is on the rise, according to the report.
Defaults on Most Household Debt Are Increasing
Recent data from the Federal Reserve on household debt service reveals a rise in the percentage of nearly all types of household loans falling into serious delinquency, defined as 90 days or more delinquent.
During the same period, serious delinquency transition rates for mortgage debt increased from 0.44 percent to 0.63 percent, while home equity line of credit debt saw an increase from 0.32 percent to 0.44 percent.
However, the most significant jumps were observed in auto loans and credit card debt. Serious delinquency transition rates for auto loans rose from 1.81 percent to 2.41 percent.
Credit card debt delinquency transitions surged from 3.35 percent to 5.08 percent, reaching an 11-year high.
The only type of household debt that experienced a decline in serious delinquency rates was student loans due to the student loan repayment freeze.
Despite the increase in delinquency transition rates, the percentage of household loans in serious delinquency has remained relatively stable throughout the Fed’s rate hikes. This is primarily because approximately 90 percent of household debt is at fixed rates, much of which was locked in before the central bank began raising rates.
“Despite the challenges American consumers have faced over the past year—higher interest rates, post-pandemic inflationary pressures, and recent banking failures—there is little evidence of widespread financial distress for consumers,” wrote New York Fed analysts in a note when the data was released in August 2023.
However, the analysts also acknowledged that rising balances could pose a challenge for some borrowers, particularly as the student loan repayment freeze expired in the fall.
In an update on the state of the U.S. consumer, New York Fed analysts stated on Oct. 18 that consumer spending has remained surprisingly strong, although a depletion of excess savings presents a hurdle.
Delinquency rates remain relatively low, and household expectations for spending growth are described as ”solid and stable.”
“Of course, the period of very low interest rates that supported many of these developments is decidedly over, at least for now, suggesting that household finances will likely tighten further in the coming months,” the analysts concluded.
What factors have contributed to the increase in credit card fees and interest rates?
N their credit card balances because most credit card APRs are variable and tied to the prime rate, which moves in sync with the federal funds rate.
The report also highlights that the increase in credit card fees has contributed to the record-breaking figures. Credit card companies have implemented various fees, such as balance transfer fees, annual fees, and late payment fees, which have added up to over $25 billion for consumers.
Experts suggest that the rise in credit card interest and fees can have significant consequences for consumers. The high cost of credit can lead to a cycle of debt, especially for those who carry balances and only make minimum payments. It can also make it challenging for consumers to pay off their debts, save money, and achieve financial stability.
Consumers are urged to be mindful of their credit card usage and to consider alternative options if they find themselves burdened with high-interest debt. Financial advisors recommend exploring strategies such as balance transfers to lower interest rates, budgeting to reduce unnecessary spending, and seeking professional assistance if needed to manage debt effectively.
The report also brings attention to the need for increased transparency and consumer protections in the credit card market. The CFPB emphasizes that consumers should have access to clear and easy-to-understand information about the costs associated with credit card usage. It advocates for stronger regulations that address excessive interest rates and fees, ensuring that consumers are not taken advantage of by credit card companies.
In conclusion, the record-breaking year for credit card interest and fees highlights the financial challenges faced by U.S. consumers. The sharp increase in interest rates set by the Federal Reserve, along with the implementation of various fees by credit card companies, has resulted in consumers paying over $105 billion in interest and $25 billion in fees. It is crucial for consumers to be proactive in managing their credit card debt, and for regulatory bodies to prioritize consumer protection and transparency in the credit card market. Only through these efforts can consumers find relief from the burden of high credit card costs and achieve financial stability.
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