The annual percentage rates on credit cards have steadily gone up over the past few years. Based on Federal Reserve data, the average APR on all credit card accounts was 21.59% as of February 2024, a big jump from 14.6% in 2021.
Credit card APRs consist of two parts: the prime rate and the APR margin. The margin refers to the amount credit card issuers add to the prime rate. The Consumer Financial Protection Bureau recently reported that credit card interest margins are the highest on record at 14.3%. That’s an increase of 4.7 percentage points over the 10 years from 2013 to 2023, while the prime rate was 5.2 points higher.
Here’s what higher credit card APRs mean for you and what’s causing the increase.
[Read: Best Credit Cards.]
Everyone Is Affected by Higher Interest Rates
Having a good credit score can earn you competitive interest rates on credit cards. But as credit card APRs trend upward, even those with good credit will have higher rates as the baseline has increased. Consumers with poor credit will feel the hike the most. While you can avoid the impact of credit card APRs by paying off balances in full, many people have no choice but to carry a balance.
According to a 2023 report by the U.S. Government Accountability Office, 45% of active accounts from April 2020 to December 2021 carried a balance.
Carrying a Balance Is More Expensive
If you’re one of the active credit card holders that carry a balance, it’s now more expensive. Here you can see the average APRs in 2020 and 2024 and how they impact interest and repayment.
In 2020, if you had a 14.71% APR on a $3,500 balance and paid $200 per month, you’d pay $463 in interest, which would take 20 months to pay off.
Using the same balance and monthly payment but with the 2024 average APR of 21.59%, you’d pay off the balance two months later at 22 months and pay $741 in interest. That’s $278 more.
It Takes Longer to Pay off Credit Card Debt
Higher credit card APRs can spell trouble for consumers who only make minimum payments. The good news is that the majority of cardholders pay more than the minimum. According to the 2023 Consumer Credit Card Market Report by CFPB, 13% of general credit card accounts and 17% of store credit card accounts make only minimum payments. However, for those who do pay the minimum, it’ll take even longer to pay off the debt.
“If you only pay minimum payments every month, then a bigger portion of your payment goes towards the interest payments and a smaller portion of your payments goes towards the balance,” says Zhexu “Edward” Ai, assistant professor of finance at Wagner College. “So they (borrowers) may want to start paying more.”
If you have a $3,500 balance with a minimum payment of $140 and the average 2021 APR of 14.6%, it would take you 30 months to pay off. If you have the average February 2024 APR of 21.59%, your payoff time jumps to 34 months. In other words, making minimum payments with a higher APR could add more time to your repayment.
[Read: Best Credit Cards for Good Credit.]
What Is Causing the Rate Increase?
There are a variety of forces at play that are affecting credit card APRs.
“Credit card rates are tied to the Federal Reserve prime rate, for example. And as we all know, rates have dramatically increased over the last couple of years. No one can predict the Fed’s moves, including the Fed … and how quickly they were increasing rates to stave off inflation,” says Lindsey Johnson, president and CEO of the Consumer Bankers Association.
A consumer’s credit also comes into play. Credit cards are unsecured — without collateral backing them — and banks must manage various risks when issuing credit cards, Johnson says.
“How likely are they to repay that credit? How are they managing credit when they do receive it? Consumers who pay their bills on time pose less repayment risk to lenders, and so they’ve got lower interest rates,” Johnson says.
Those with higher rates also affect overall APRs. According to the American Bankers Association Journal, the increase in APR margins is driven by an influx of subprime accounts and a larger share of accounts that carry a balance.
[Read: Best Credit Cards for Bad Credit.]
How to Avoid Paying Credit Card Interest
High credit card APRs can have a significant impact on consumers’ finances. But there are ways to avoid or lessen the impact.
— Pay off balances each month. The easiest way to avoid credit card interest is to pay off your balances in full each month by the due date. Doing so resets your balance and avoids tacking on any interest from carrying a balance into the next month.
If paying the entire balance isn’t feasible, aim to make more than the minimum payment. Any amount over the minimum can help you chip away at the balance more and reduce interest costs.
“We know that not everybody can pay their balance off in full every month, but keeping it as low as possible will help you deal with rising APRs,” says Martin Lynch, president of the Financial Counseling Association of America.
— Avoid overspending. As a result of inflation over the past few years, everything has gone up. Many consumers’ spending went up without making any changes to their budget. It can be tough to avoid overspending when everything costs more. But now is a good time to evaluate your expenses and cut back on some of the extras if it means avoiding credit card interest.
Comb through your expenses by looking at your credit card transaction history.
— Which expenses can you eliminate?
— Which expenses can you reduce?
You can also start noticing patterns in your spending, too. For example, you might overspend on days when you’re tired, down or stressed. Retail therapy can be a coping mechanism that makes us feel better in the moment but can have a negative impact in the long run. When you recognize a pattern, you can make changes.
— Stay within budget. To help you avoid overspending, stay within a budget. “It has to be reasonable; it has to be realistic. We don’t want you defaulting on other types of credit, other financing, just to pay an unsecured debt. People have to prioritize as well,” says Lynch.
Calculate your total monthly income and your monthly expenses. Ideally, your expenses are well below your income. That can help you avoid putting things on your credit card and carrying a balance. Tracking your expenses will help you see if you’re on target.
— Make adjustments. If you want to avoid paying credit card interest, some strategies can help. You can use a debit card for spending instead. Debit cards take funds from your checking account and don’t charge interest. However, there may be overdraft fees if you spend more than what’s in your account.
Also, paying off your credit cards weekly instead of monthly may help. “For some consumers, that might mean making multiple credit card payments per month so that you’re not waiting until a larger balance has accrued to pay it when … (it) is due,” says Johnson.
If you have a balance and excellent credit, you may qualify for a 0% APR credit card. Paying off your balance during the promotional period can lower interest costs. Consumers who are feeling the pressure of high APRs and balances can also look for support.
“If you have accounts that you’ve nearly maxed out, or you’re starting to miss payments, or you think you’re about to miss payments, that’s the time to talk to a nonprofit credit counselor. We can look at who your creditors are (and) what concessions they’d be willing to grant,” says Lynch.
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Credit Card APRs Are on the Rise: What This Means for You originally appeared on usnews.com
