Credit card interest rates have moved swiftly higher this year, significantly increasing the cost burden on those who carry a balance.
Over the past two quarters the average annual percentage rate has grown from 15.91% to 17.13%, leaving the current rate just a tick under the all-time record high of 17.14% that was reached in 2019, according to the Federal Reserve.
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The interest you pay your card issuer to borrow money when using a credit card expressed as a yearly rate is called the annual percentage rate or APR. Typically users can avoid paying interest on purchases when they pay their balance off in full each month when the bill is due. But roughly half of cards have a balance, said Matt Schulz, chief credit analyst at LendingTree, and for those borrowers higher rates can be expensive.
A card user that owes $5,000 and pays $250 each month will pay an extra $81 over the life of that balance with the higher 17.13% APR compared to the 15.91% rate from earlier this year. Bump that debt up to $10,000 and the difference in interest payments between the two rates is nearly $600.
That jump in APR is eye-catching, said Schulz, because, “we haven’t really seen APRs for new credit card offers move much in recent years unless the Fed has made a move.”
One reason why rates have gone up is that more people with poorer credit have gotten credit cards recently, said Schulz.
“The average APR is being driven up by more subprime cardholders carrying a balance while more prime cardholders pay off their balances,” he said. “You have more people with higher APRs carrying balances and fewer people with lower APRs doing so, sending the overall average higher.”
Credit card balances are rising again
While credit card trends are returning to normal after banks cut back on the credit card business during the early part of the pandemic, there has been some growth in credit cards issued to people with lower credit scores, according to new research from the Federal Reserve Bank of New York.
The good news is that people are generally paying off their credit card debt and the delinquency spike some analysts feared at the beginning of the pandemic has yet to happen.
But credit card balances are beginning to rise again, as pandemic supports from the government wind down and people return to more normalized spending patterns.
Credit card balances rose a bit in the third quarter, by $17 billion, following a similar increase in the second quarter, according to the New York Fed. But credit card balances are still $123 billion lower than they were at the end of 2019.
“We are again seeing credit card balances increase in the third quarter after a solid rise in the previous [quarter],” said Donghoon Lee, research officer at the New York Fed. “As pandemic relief efforts wind down, we are beginning to see the reversal of some of the credit card balance trends seen during the pandemic, namely reduced consumption and the paying down of balances.”
Credit card balances typically follow a seasonal pattern, which spikes at the end of the year as people do their holiday shopping, according to the New York Fed. That’s typically followed by a large reduction in the first part of the year as borrowers pay off their holiday debts and modest increases in the second and third quarters. After the pattern was interrupted by the pandemic, credit card use is returning to its pre-pandemic seasonal norms.
But the pandemic and the economic recovery has widened the gap between different types of card users. For many people whose work was not interrupted but their spending was, a year or more of pandemic-related restrictions in travel and activities gave them a chance to catch up on what they owe.
While for other people – especially those who are paying higher APRs – the credit card has become a lifeline.
“In the wake of the pandemic’s worst economic impacts there is a group of people who are doing really, really well and have extra cash and are feeling good,” said Schulz, “and another subset of people whose financial lives have been devastated and they are really struggling.”
How to deal with high-interest debt
You are your own best advocate in getting out from under a high APR, said Schulz. And you can start by calling your card issuer and asking for a lower interest rate, he said.
“People don’t think it will work,” he said. But LendingTree’s research indicates a majority of the time people who ask for a lower interest rate, get one. “It can be a reduction of 10 percentage points or more. That is a significant thing.”
One way to increase your chances of getting a lower rate is to come prepared with information on other card offers that you have seen available, he said.
“You can say, ‘I’ve been a customer for a long time, but my interest rate is really high. I saw this card that gives me this rate, could you match it?,’” he said. “There is a good chance that they’ll listen and possibly work with you.”
If you have a hardship, such as a job loss or medical issue, you can mention that to your card issuer, he said.
“Banks have hardship programs where they will reduce interest rates, reduce minimum payments, waive fees, to get you over a short-term financial hump.”
If you are not able to get your APR lowered and are still wrestling with debt, a balance transfer card can be useful, Schulz said.
“It can sound weird to get another card to help you, but a 0% interest rate on a balance transfer card can help you avoid accruing interest on that card for nearly two years,” he said.
But it is very important to understand the fees, what the rate will be after the low rate period ends and if there are any deadlines with balance transfer cards.
“They’re everywhere now and banks are eager to lend if you have decent credit,” Schulz said.