Why It Keeps Getting More Expensive to Carry a Credit-Card Balance
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What is the main topic discussed in this episode?
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Here's your money briefing for Friday, October 11th. I'm J.R. Whalen for The Wall Street Journal. The Federal Reserve is expected to continue lowering interest rates in the coming months, but that isn't likely to translate to relief for people carrying a credit card balance.
What is the current average credit-card interest rate and balance consumers carry?
Earlier this year, Consumer Financial Protection Bureau finalized an $8 late fee cap on credit card fees. In response to this late fee cap, credit card issuers and banks have said that they've imposed quote unquote mitigating actions to get ahead of the revenue that would be lost
We'll talk to Wall Street Journal reporter Angel Au-Young after the break.
Listen at schwab.com slash washingtonwise.
Why haven't credit-card rates fallen with recent Federal Reserve cuts?
The cost to carry a credit card balance is the highest it's been in a generation. Wall Street Journal reporter Angel Au-Young joins me.
How do APR margins and the prime rate combine to set card interest rates?
Angel, what's the average rate for credit card customers who are carrying a balance?
So according to the Federal Reserve, the average credit card rate as of May of this year was around 21.5%, which is around the highest level ever recorded in the Fed data, which goes back to 1994. And the average balance that people are carrying today is around 6,300, according to data from the TransUnion, which looked at the average balances of cardholders in the second quarter of this year.
Why haven't those rates fallen in line with the interest rates that the Fed has cut?
When you look at the credit card interest rate, it's comprised of two factors. The first is the prime rate, and the prime rate is tied to the Fed rate.
Which borrowers are considered higher risk and how does that affect rates?
So if you looked just at the prime rates of credit cards, they have moved in lockstep with the Fed raising or lowering their interest rates. But the other factor in a credit card interest rate is the APR margin. That's the added interest that credit card issuers will charge on top of the prime rate. This is the part of the credit card interest rate that goes towards covering expenses like preventing fraud, making sure the transactions are running smoothly. But it's also where these credit card issuers make their profit margins. And in looking at
What is the CFPB's proposed $8 late-fee cap and how did issuers respond?
how the APR margins have moved in the last couple years, it's not directly tied to the Fed's rate. So whereas the prime rate is tied to the Fed rate, so that is one potential reason as to why rates haven't fallen in lockstep with the interest rates. But then when you ask the credit card issuers and the banks, you know, why the APR margins haven't lowered and locks up with the Fed rates, they will say that they've loosened their underwriting rules, or they have just granted more access to credit to consumers that traditionally don't have access to loans like credit cards. And in the increasing APR margins cover the risk that's tied to lending to quote unquote, riskier consumers.
Why do banks and credit card issuers characterize these customers as risky?
So they characterize these consumers as risky because it's the consumers who essentially may be facing personal financial hardships and for whatever reason, cannot pay a credit card balance in full every month. As soon as you carry your credit card balance, that increases a consumer's risk profile because then the banks and the credit card issuers are effectively lending money to the consumers who cannot pay the full amount every month.
Why is the $8 late-fee cap tied up in court and what is its current status?
In terms of the credit scores, the prime borrowers are the people who have credit scores that are 660 or higher. Near prime is around 620 to 659. The banks and the credit card issuers, when they see consumers with credit scores lower than around 620, then they consider them a subprime.
How are consumer groups reacting to rising credit-card rates and who is most affected?
In your story, you mention a cap on late fees that companies can charge cardholders. How does that factor into these rising rates?
Earlier this year, Consumer Financial Protection Bureau finalized an $8 late fee cap on credit card fees. In response to this late fee cap, credit card issuers and banks have said that they've imposed quote unquote mitigating actions to get ahead of the revenue that would be lost from this late fee cap.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:00–0:38
2
What is the current average credit-card interest rate and balance consumers carry?
0:38–1:43
3
Why haven't credit-card rates fallen with recent Federal Reserve cuts?
1:43–1:51
4
How do APR margins and the prime rate combine to set card interest rates?
1:51–2:35
5
Which borrowers are considered higher risk and how does that affect rates?
2:35–3:10
6
What is the CFPB's proposed $8 late-fee cap and how did issuers respond?
3:10–4:23
7
Why is the $8 late-fee cap tied up in court and what is its current status?
4:23–4:43
8
How are consumer groups reacting to rising credit-card rates and who is most affected?
4:43–8:13
Speakers
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