APR Margins Are Driving Sky-High Credit Card Rates

The average annual percentage rate (APR) on credit cards reached 22.8% in 2023, according to a report from the Consumer Financial Protection Bureau (CFPB). This figure is the highest level recorded since the Federal Reserve began collecting this data in 1994. Over the last 10 years, the average APR on credit cards has almost doubled, standing at 12.9% in late 2013. Interest rates have been rising consistently over that time frame, but that’s only a small part of the equation. Equally important is the fact that the APR margin—the difference between the average APR and the prime rate—has reached an all-time high. Almost all credit cards link their interest rates to the prime rate, plus a variable percentage (denoted as X). That X varies by issuer and cardholder. The prime rate was just over 3% in 2013, at the start of the period that the CFPB is examining. It’s now over 8%. With interest rates remaining high and inflation still haunting many people’s memories, many card issuers have been able to raise their X without much backlash from consumers. As the CFPB noted in its 2023 Consumer Credit Report, “Survey data suggest that many consumers do not know their credit card APR, nor do they shop with it in mind, focusing instead on annual fees and rewards.”

APR = X

In the current environment, X largely represents the APR margin, which increased 4.3 percentage points from 2013 to 2023. The APR margin for revolving accounts now stands at 14.3%, marking its highest point in recent history. According to the CFPB, roughly half of the increase in average APR over the past decade can be attributed to issuers raising their APR margins. This increase has affected borrowers across the credit spectrum, even those with the highest credit scores. The average APR margin for accounts with credit scores of 800 or above grew by 1.6 percentage points from 2015 to 2022, without any corresponding increase in late payments. Unsurprisingly, these APR margin increases have translated into greater profits for credit card issuers. The return on assets for general-purpose credit cards crept up to 5.9% in 2022, up from 4.5% in 2019. In contrast, the return on assets for private label credit cards saw a more modest increase to 2%.