While interest rates are decreasing, credit card rates remain remarkably high.

The current average credit card interest rate stands at 20.51%, according to Bankrate, slightly under the historic high of 20.79% reached in August.

These elevated rates can be partly attributed to actions by the Federal Reserve, which significantly raised rates in 2022 and 2023 to combat rising inflation.

However, this isn’t the only factor. Credit card rates have climbed higher than ever before, even surpassing periods when general interest rates were also on the rise.

Why Are Credit Card Rates So Elevated?

Experts in the field believe the main reason for the steep credit card rates is that issuers are applying unprecedented “margins.” This refers to the additional interest that card providers charge above the prime lending rate.

Odysseas Papadimitriou, CEO of WalletHub, describes this as akin to a profit margin.

Currently, the average margin for credit cards sits at 14.9%, according to WalletHub’s data from August. This means that cardholders generally pay about 15% in annual interest on top of the prime rate, which is ideally the rate set for the most reliable borrowers.

These margins have surged to record levels, compared to an average of 13.2% in August 2020 and 10.7% in August 2015, as reported by WalletHub.

Many discussions have focused on the Federal Reserve’s interest rate changes regarding credit card rates. However, the current rates are sharper than ever before, even in times when benchmark interest rates were higher than what we see now.

For instance, during the mid-2000s, average credit card rates varied between 15% and 16%, according to WalletHub, which is considerably lower than the rates in 2024.

In the mid-2000s, the prime lending rate was positioned at 9.5%, whereas it sits at 8% today.

The Rise of Credit Card Margins Since the Great Recession

Credit card margins have significantly increased since the Great Recession, a period characterized by the federal funds rate remaining close to zero.

According to Papadimitriou, during the years of zero-percent policies, banks capitalized on these conditions to inflate the margin between their funding costs and what they charged consumers.

Experts within the industry highlight various legitimate factors that have led to these increased margins.

Card issuers need to account for costs associated with cardholders who fail to make payments, as the credit-card delinquency rate is currently around 3.25%, the highest since 2011. This rate reflects overdue credit card balances.

Ted Rossman, a senior analyst at Bankrate, notes, “Card issuers are adding extra profit margins to make up for the debts that some consumers won’t repay.”

The increase in card margins is also attributed to higher costs related to administration, fraud prevention, and adherence to regulatory standards. The American Financial Services Association, the trade group representing card companies, indicated that overhead expenses, like labor costs, have risen across all sectors, including financial services. They noted, “Compliance expenses have increased due to stringent government regulations, and the threat from sophisticated fraud has elevated the costs for prevention.”

Increased Margins Contribute to Rising Card Rates

An analysis released by the federal Consumer Financial Protection Bureau in February revealed that rising margins account for approximately half of the increase in card rates over the past ten years.

Similar to findings from WalletHub, the federal agency noticed that profit margins for credit card companies have risen steadily from an average of 9.6% in 2013 to 14.3% in 2023. This increase equates to an additional $250 in interest payments for the average credit card user in 2023.

The agency stated that these elevated margins “have enhanced issuers’ profitability over the last decade,” and that “higher APR margins have permitted credit card firms to earn returns that significantly surpass those from other banking operations.”

Recent years have seen both credit card rates and profit margins reach their highest levels.

In 2022 and 2023, the Federal Reserve raised the federal funds rate by more than five percentage points, bringing it to a peak range of 5.25% to 5.5%.

During this time, credit card rates experienced even higher increases. WalletHub reports that the average card rate jumped more than seven percentage points from February 2022 to August 2024, climbing from 14.6% to 21.8%. (It’s worth noting that WalletHub and Bankrate report slightly different average rates.)

When the Fed reduced the federal funds rate by half a point in September, lowering it to a range of 4.75% to 5%, credit card rates fell only slightly.

Some lenders even reacted to the rate cut by raising fees on new cards, as stated by the consumer agency in a communication to YSL News.

Many Card Users Are Overextended

According to a report from Bankrate in October, one out of five cardholders has reached their credit limit since the Fed began increasing rates.

Having a maxed-out credit card can negatively impact a consumer’s credit report. “The longer this situation persists, the worse it can affect your credit score,” noted Sarah Foster, an economic analyst at Bankrate.

Bankrate also found that half of cardholders carry over a balance each month instead of paying it off completely.

As of August, the total credit card debt in the U.S. reached $1.3 trillion, with the average household carrying $10,805 in credit card debt. Both numbers are nearing record highs.

More than half of credit card holders are now categorized as “financially unhealthy,” according to J.D. Power’s report from August. This term is used for cardholders who are struggling to meet monthly payments and lack a long-term financial strategy.

Moreover, only 25% of cardholders in the J.D. Power survey indicated they felt that card rewards, like travel miles and other benefits, were enhancing their lives.

“We’ve noticed a decline in satisfaction among those who are carrying debt rather than paying it off,” said John Cabell, managing director of payments intelligence at the consumer research group. “It’s becoming increasingly expensive to maintain credit card ownership.”