The Makeup of Credit Card APRs: Exploring Profit-Driven Increases

Have you ever wondered what exactly makes up your credit card APR? I just read an article by Dan Martinez and Margaret Seikel titled "Credit card interest rate margins at all-time high", and it got me thinking - Given the rising number of defaults, it's likely they're increasing the APR margin to compensate for losses by charging more interest to responsible consumers. Surprisingly, and to my disappointment, defaults aren't rising, and the APRs are climbing anyway???

In essence, it appears that credit card issuers are increasing what's known as the Credit Card Margin, a significant factor in determining the overall APR, with the aim of boosting profits.

The Credit Card Margin, composed of the Prime Rate established by the Federal Reserve to regulate economic growth, and the APR Margin set by card issuers, represents the additional cost to cardholders for maintaining a balance on their cards. So, one wouldn't expect the APR Margin to be arbitrary. Given that most economic truths revolve around supply and demand, you'd think credit card issuers would keep their margins in check to maintain a competitive edge. But based on what I just read, it seems they can keep raising this margin, raking in more profits, and seemingly without much resistance from consumers. Or perhaps consumers do care? When was the last time you based your credit cards selection on the advertised APR? (Prime Rate + APR Margin).

In 2023, major credit card issuers raised the average APR margin by 4.3 percentage points over the past decade "despite lower charge-off rates and a relatively stable share of cardholders with subprime credit scores". This hike resulted in an estimated $25 billion in additional interest fees charged to consumers with around $590 billion in revolving balances. The impact is significant, with an average cost of over $250 per consumer holding a $5,300 balance across credit cards. The excess APR margin affects consumers across all credit tiers, including those with the highest credit scores, potentially leading to persistent debt or delinquency as finance charges accumulate faster than payments towards the principal.

"Over the last 10 years, the average APR on credit cards assessed interest has almost doubled from 12.9 percent in late 2013 to 22.8 percent in 2023 — the highest level recorded since the Federal Reserve began collecting this data in 1994."??

For many of us, our card selection is driven by the rewards, and in those cases, APR isn't much of a factor we are considering. Why? Becauase when using rewards cards, the goal is to avoid carrying a balance or accruing interest. This strategy is essential because any benefits gained from rewards can easily be nullified by the high average APR of 24.61%

While we advise against using credit cards to leverage income, which often leads to carrying credit card balances at a ridiculous cost to your financial peace of mind, if you must carry a card in case of an emergency, let's make a pact to choose that card wisely. Pay close attention to the APR and opt for cards with more competitive rates. While this trend of rising margins may seem unstoppable, if we work together through the power of consumerism to select cards with more competitive rates, we can expect this trend to slow and eventually reverse.????