In a recent study conducted, it was found that the average credit card interest rate in United States has reached its highest level since 2019. The study analyzed approximately 200 of the most popular credit cards from over 50 issuers, providing a comprehensive overview of the state of credit card interest rates in the country.
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| Average interest rates on new credit card offers in the U.S. in May 2023 |
The average annual percentage rate (APR) offered with new credit card offers currently stands at 23.98%, marking an increase from the previous month's rate of 23.84%. This rise comes after the Federal Reserve implemented its third interest rate hike of 2023, with a 0.25 percentage point jump on May 3. While experts predict fewer rate increases in the remainder of the year, the possibility of another hike in June remains. However, it is also uncertain whether the Fed will choose to keep interest rates stable for the first time in over a year.
It's important to note that credit card issuers do not offer a single rate to all applicants. The rates vary based on factors such as an individual's credit history. Those with excellent credit can expect lower rates, while individuals with poor credit may face higher rates. On average, those with excellent credit are offered an APR of 20.53%, whereas those with poor credit are offered an average APR of 27.43%.
Fortunately, the average FICO Score in United States has remained steady at 714, indicating that most Americans may be eligible for the lower interest rates. However, for those with higher rates, the financial burden can be significant. A simple illustration demonstrates the impact of interest rates on paying off credit card debt. If someone owes $5,000 on a card and pays $250 per month, at a rate of 27.43%, they would pay $1,758 in interest over 28 months. Lowering the rate to 20.53% would result in $1,173 in interest over 25 months, saving $585 and reducing the payoff time.
The study also revealed that the type of credit card chosen affects the APR offered. Cash back cards and 0% balance transfer cards tend to have lower APRs compared to travel rewards cards. On the other hand, secured credit cards, typically used by individuals new to credit or those rebuilding their credit, have higher overall APRs.
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| Average interest rate on current credit card accounts |
Examining the current credit card accounts, the Federal Reserve's data shows that the average interest rate for accounts carrying a balance has risen to 20.92%, while the average APR for all accounts is 20.09%. These figures represent the highest rates since the Federal Reserve began tracking credit card interest rates in 1994. Given that more than half of active credit cardholders carry a balance, these rates have a significant impact on Americans' finances.
Looking at the historical trend of credit card interest rates, there have been notable fluctuations in recent years, primarily influenced by the Federal Reserve's actions. Rates steadily increased from 2015 until 2019, followed by a dramatic reduction in response to the economic turmoil caused by the pandemic. However, the Fed reversed course in 2022, implementing seven rate hikes. In 2023, there have already been three hikes, and further increases remain possible.
Prior to 2015, credit card rates were relatively stable due to the Credit Card Accountability, Responsibility and Disclosure Act of 2009. The legislation introduced various consumer-friendly provisions, which prompted credit card issuers to adjust their rates and fees. While stability persisted for some time, subsequent Federal Reserve actions led to the higher interest rates observed today.
For individuals concerned about high interest rates on their credit cards, there are several strategies to consider. One approach is to explore 0% balance transfer credit cards that offer an introductory period with no interest on balance transfers. These cards can provide a temporary respite from interest charges, allowing individuals to focus on paying off their debt without accumulating additional interest. It is essential to carefully review the terms, fees, and deadlines associated with these cards before applying.
Another option is to negotiate with credit card issuers for a lower interest rate. A survey conducted revealed that 76% of cardholders who requested a lower APR were successful, with an average reduction of around 6 percentage points. However, it is surprising that only 19% of cardholders actually made the request. By comparing offers from other credit cards and using them as leverage during negotiations, individuals can potentially secure a better interest rate.
In these challenging times of increasing interest rates, it is crucial for individuals to take proactive steps to reduce credit card debt. Paying down debt not only helps save money on interest but also frees up additional funds for savings or emergencies.
It is worth noting that the methodology used in the study involved analyzing online terms and conditions for approximately 200 credit cards from more than 50 issuers, including banks and credit unions. The study focused on standard purchase APRs and did not include introductory or promotional rates in the calculations.
As credit card interest rates continue to rise in United States, it becomes more important than ever for individuals to manage their credit card debt responsibly, explore alternative options, and take advantage of opportunities to secure lower interest rates. By staying informed and proactive, consumers can make informed financial decisions and navigate the evolving landscape of credit card interest rates.
