WSJ Your Money Briefing - Why It Keeps Getting More Expensive to Carry a Credit-Card Balance

Episode Date: October 11, 2024

The average credit-card interest rate was 21.5% in May, hovering around its highest level in Federal Reserve data going back to 1994. Wall Street Journal reporter Angel Au-Yeung joins host J.R. Whalen to also discuss why the rates remain so high and the status of a proposed $8 cap on credit-card late fees. Sign up for the WSJ's free Markets A.M. newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

Exchanges. The Goldman Sachs podcast featuring exchanges on the forces driving the markets and the economy. Exchanges between the leading minds at Goldman Sachs. New episodes every week. Listen now. Here's your money briefing for Friday, October 11th. I'm JR 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. 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. This podcast is brought to you by CME Group, the world's leading derivatives marketplace, offering the widest range of global benchmark products across all major asset classes. CME Group, where risk meets opportunity.

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. 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. 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 how the APR margins have moved in the last couple of 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 in the banks, why the APR margins haven't lowered in lockstep 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 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. 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. In your story, you mentioned 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. So, Red Financial and Synchrony are both credit card issuers that deal with more lower

income consumers than say a big bank. Prior to this late fee cap passing, Brett Financial internally said, we're never going to put credit card interest rates higher than 29.99%. But now that there is this late fee cap, Brett has said that they have gotten rid of this internal soft cap and that it's very possible that they will be raising credit card interest rates above 29.99%. Synchrony is another credit card issuer that deals with the same level

of lower income consumers as bread. Around the time that the CFPB finalized their $8 late fee cap, Synchrony raised interest rates on one of their store retail cards to as high as 34.99%. on one of their store retail cards to as high as 34.99%. Synchrony also implemented $1.99 fee for every paper statement for some of its card programs. And Synchrony has said that this was all in direct result of the CFPB's $8 late fee cap.

Now that $8 cap that the CFPB finalized has not gone into effect yet. What's the latest on that? So shortly after the CFPB finalized has not gone into effect yet. What's the latest on that? So shortly after the CFPB finalized the $8 late fee cap, a consortium of banking groups and industry groups sued to halt the implementation of the late fee cap. And a judge in Texas agreed with those banking industry groups. And the $8 late fee cap, it remains tied up in court. It has not been implemented yet. What have consumer groups said

about these rising credit card rates? They have voiced a lot of concern. And in many ways, the CFPB's $8 late fee cap is a direct response to consumers expressing concern about how high rates have gotten. And when you think about who is the most impacted by high credit card interest rates, it is the people who are most vulnerable.

It is the people who cannot pay their balance in full every month. And consumer watchdog groups have definitely voiced concerns about these rising interest rates for years now, especially in the last couple of years when rates have gone up in unprecedented levels. That's WSJ reporter Angel Al Young. And that's it for your money briefing. Tomorrow we'll have our weekly markets wrap up, what's news in markets. And then we'll be back on Monday. This episode was produced by Trina Manino and Zoe Kulkin.

I'm your host, JR Whalen. Jessica Fenson and Michael Laval wrote our theme music. Our supervising producer is Melanie Roy. Aisha Al-Muslim is our development producer. Scott Salloway and Chris Zinsley are our deputy editors. And Falana Patterson is The Wall Street Journal's head of news audio. Thanks for listening.