Interest rates on credit cards could reach a 40-year high
Credit card interest rates are expected to reach a four-decade high this year, a positive for lenders poised to benefit from the increased income while painful for consumers facing escalated borrowing costs.
Rates are likely to reach an average of 20.5 percent by the last week of the year, up from 19.6 percent in the final week of 2022, said Greg McBride, chief financial analyst at Bankrate. That would be the highest average Bankrate has seen in roughly 40 years of collecting the data, he said. If the United States slips into a recession, as predicted by many economists and executives, rising interest rates would cause additional headaches for card customers.
“In a weaker economic environment, credit quality tends to suffer as people fall behind or default,” McBride said.
The Federal Reserve aggressively raised interest rates last year in a bid to tamp down soaring inflation, and those increases have made their way into borrowing costs for credit card customers. That can provide a boon for banks, which benefit from gains in net interest income, or the revenue collected from loan payments minus what depositors are paid.
Even with interest rates rising, credit card delinquencies have remained low because consumers are still sitting on cash and the job market has stayed strong, allowing card customers to keep up with their payments.
But banks and their clients risk running into trouble if the economy starts contracting and the unemployment rate ticks up.
Borrowers would have a tougher time making payments, resulting in higher default rates for lenders.
Even if the economy starts to contract and the job market softens, it would take some time before customers’ financial pain makes their way into banks’ credit card metrics.
“People are going to try to make those payments for a while,” said Christopher Odinet, a professor at the University of Iowa’s law school who focuses on consumer finance.
The average annual percentage rate for store credit cards is already even higher than Bankrate’s predicted average for all cards later in 2023, reaching 26.7 percent last year.
Individual retail brand cards from Bloomingdale’s, Shell, Macy’s and Exxon Mobil have already exceeded 30 percent.
Even if the U.S. slips into recession, hurting credit card customers, their lenders wouldn’t necessarily be badly damaged, Bankrate’s McBride said.
Banks have had time to mitigate risk, and they’re much better capitalized than they were going into past downturns, he said.
“Banking is a very cyclical business,” McBride said, “but that doesn’t necessarily mean it’s unprofitable in a weak economy — it would just be less so.”