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How much higher can card interest rates go?

Kelly Dilworth
How much higher can card interest rates go?

As average credit card APRs continue to break records, some cardholders may be wondering how much higher credit card interest rates can go.

Over the past 10 years, the average APR for new credit card offers has climbed from 13.15 percent in June 2007 to an all-time high of 15.96 percent in June 2017 – and that’s just taking into account credit card issuers’ best offers. CreditCards.com only considers a card’s lowest available APR when calculating average interest rates. In 2008, when the Federal Reserve slashed short-term interest rates to near zero, average card rates hovered between 11 and 12 percent.

Nearly all credit cards these days offer new cardholders a wide range of potential APRs, so many (if not most) cardholders are likely paying much more to carry a balance. For example, the average maximum credit card interest rate that card issuers are currently offering new customers is 22.99 percent, according to CreditCards.com’s rates data, while the average median APR is 19.48 percent.

Lenders are still gradually responding to the Federal Reserve’s latest rate hike, so those rates almost certainly will rise over the next month as more card issuers match the Fed’s quarter-point rate increase. Typically, when the Federal Reserve makes a change to its key benchmark interest rate, the federal funds rate, most lenders change rates on new offers by the same amount; but they sometimes take a few weeks – or months – to do so.

Currently, only a handful of major card issuers have changed rates in response to the Fed’s June 2017 change, so it’s likely that the average card APR will inch closer to 16.14 percent – a quarter-point higher than it was before the Fed’s rate change – relatively soon. Meanwhile, the average maximum rate new cardholders are charged could rise as high as 23.24 percent. (Keep in mind, though, that these are just estimates. A small number of issuers may choose not to increase APRs or may buck the trend and cut rates instead.)

Rate increases won’t stop there, either. Most Federal Reserve policymakers predict that the Fed will increase rates at least one more time this year and then at least three more times in 2018.

The Fed’s rate-setting schedule will largely depend on how well the economy does over the next year. But if the Fed sticks to current projections and card issuers keep raising rates at the same pace, the average minimum card rate could rise as high as 17.14 percent (!) or more by the end of 2018 – and that’s before the federal funds rate comes even close to where it was in late 2007 when the Fed first started cutting short-term interest rates. In June 2007, for example, the federal funds rate was set at 5.25 percent. It’s currently set at a target range of just 1 percent to 1.25 percent.

If the Federal Reserve were to gradually increase rates until the federal funds rate hit pre-recession levels and card issuers kept increasing rates by the same amount – just as they are doing now – we could, in theory, see the average card APR for new offers climb as high as 20.39 percent. Meanwhile, cardholders with less-than-perfect credit could potentially find themselves paying rates as high as 27.49 percent. That’s more than 4 percentage points higher than the average new credit cardholder with bad credit is paying now.

Lenders aren’t necessarily obligated to match the Federal Reserve’s rate increases, so it’s possible they could adjust the spread between the U.S. prime rate (which is directly influenced by the federal funds rate) and the rates they offer customers and stop hiking their advertised APRs. After all, the average card APR was just 13.15 percent in June 2007 when the federal funds rate was set at 5.25 percent. Right now, the difference between the U.S. prime rate and the average card APR is nearly 7 percentage points higher than it was then.

Lenders may even decide to cut rates in order to compete for more customers. As cardholders’ APRs break new records, it seems reasonable that people with excellent credit will start to demand lower rates. As I’ve written before, it’s become increasingly difficult to find a truly low rate card – but it doesn’t have to be that way.

Lenders may also be forced to slow down rate increases if more cardholders find their new rates unaffordable and struggle to pay their bills. Defaults on credit cards are already on the rise; if average rates rise by several more percentage points, will people with considerable debts still be able to pay them?

So far, credit card issuers show no signs of putting the brakes on rising interest rates anytime soon. But they may be forced to reckon with a key question as more people balk at paying their bills: When it comes to credit card interest rates, how high is too high before average card rates become unsustainable?

See related: Card APRs will rise quickly after Fed rate hike

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