US consumers pay higher interest rates on their credit card ages than they have for more than a quarter of a century, and the Federal Reserve's rate reductions are no guarantee that they will get much relief.
The average interest rate on interest-bearing card accounts peaked at 17 percent in May, according to Fed data, the highest in 25 years that the central bank has made the calculation. Weekly data based on a Creditcards.com survey of 100 national card issuers found an average rate of 17.8 percent at the end of July, another high decade.
Short-term interest rates rose from long-term low targets as the Fed gradually raised the reference rate between the end of 201
Analysts point to two groups that have contributed to the aggressive rise in rates by issuing banks: legislators and customers themselves.
The CARD Act of 2009, a US law designed to protect cardholders from exploitation, limits the ability of banks to raise interest rates on existing balances. Card issuers "can't price you when they sell you a card – so they have to price [more risks]," said John Hecht of Jefferies, a broker.
Another factor, he said, was that customers were not focused on what prices they would pay, but instead on what benefits, from cashback to airline miles, their cards brought.
"When you hear [bank] leadership groups talk about competition in short, it's not in terms of awards, but in terms of rewards," Hecht said.
Since the crisis, short-term interest rates are often set by adding a premium to a fluctuating index – most often the prime rate, the banks with the lowest interest rates available to non-bank customers. The primary interest rate again is directly related to the inflow of the fund rate set by the Federal Reserve.
Following the central bank's decision to cut its benchmark portfolio last week, JPMorgan and Citigroup were number one and two US card banks, respectively, by lending volume, lowering primary rates by a quarter of 1 per cent. This will flow through to the prices that many cardholders pay, at least initially. But card rates and prime rate do not move in pace.
Brian Riley of Mercator, a research group, pointed out that since 2014, the prime rate had risen by 1.25 percentage points, to an average of 5.5 percent, while the card was up 3.95 percentage points, more than three times as much .
Card companies have also found other ways to increase what card customers pay, such as using annual fees, foreign transaction fees, and balance transfer fees, according to Ted Rossman of Creditcards.com.
“I don't think this [Fed] interest rate cut is a big gain for consumers with credit card debt – the [their] interest rate is already high, and even if it goes down a bit. . . [they] You may be paying higher fees in other areas, "Rossman said.
For banks, the large spread between the cost of money and what they can charge borrowers has made the card business particularly profitable compared to other types of loans, especially given that default rates are still very low by historical standards. At JPMorgan, card lending revenues increased 11 percent to $ 16.4 billion in 2018.
There is about $ 850 billion in US credit card debt, according to the Fed. This is a record dollar, even though the figure as a share of gross domestic product had dropped from 24 to 16 percent over the past decade.
Given the long duration of the current expansion, banks that are expanding too aggressively to short lending take a risk, said Brian Foran of Autonomous Research. "There's a lot of debate [in the industry] about whether it's time to plant or harvest," he said. “You can push for growth with marketing, increased line sizes, [or] underwriting easing. But if the dreaded recession actually hits next year, you're stuck with all the losses. "