Credit card interest rates continue to rise despite the Fed cutting the benchmark rate
In the context of rising cryptocurrency interest rates and expensive consumer loans, credit card interest rates are continuously increasing, despite the Federal Reserve (Fed) having made 3 cuts to the benchmark rate in 2024. Banks seem uninterested in the Fed's policies.
According to a LendingTree survey, the average APR has increased for the third consecutive time in June, reaching the highest level since last year. Bankrate also shows that the average interest rate for all types of credit cards exceeds 20%, while new card offers hit 24.3%, according to LendingTree data.
This is not just a small bump. It causes pain for borrowers. Clifford Cornell, a financial planner at Bone Fide Wealth in New York, shares: 'These interest rates are suffocating, rapidly increasing your debt like a tidal wave.' And this is exactly the current situation, as those with credit card debt will see interest accumulate like a fortress, month after month.
Credit card interest rates continue to rise even though the Fed has not made any new increases.
This has never happened suddenly. Credit card interest rates remained unchanged for many years after Congress passed the Credit CARD Act in 2009, helping to stabilize them. However, since 2015, the Fed began raising the benchmark rate, causing the interest on most credit cards – due to their volatility – to gradually increase and then surge.
To date, the average interest rate has nearly doubled, from about 12% to the current level. This increase surged strongly in 2022, when the Fed raised the benchmark rate 11 times starting in March. Similarly, credit card interest rates subsequently increased with each rate hike from the central bank.
However, currently, despite having cut rates 3 times in 2024 and holding steady since December, credit card interest rates continue to climb. Banks are not easing off. They still decide to maintain higher rates, regardless of the Fed's policies. Some lenders even explicitly state that these interest rates will be maintained.
Matt Schulz, head of credit analysis at LendingTree, explains: 'This trend could continue in the coming months,' he said. The main reason is risk. Banks are trying to protect themselves from the possibility of borrowers defaulting, especially during times of economic instability.
Schulz calls it a defensive action. 'This reflects banks' efforts to protect themselves from risks during uncertain times, causing them to push the borrowing costs for consumers higher,' he explains. These risks are passed on to customers through higher interest rates.
Charlie Wise, senior vice president of TransUnion, analyzes borrowing trends in the borrower community. He states that when the situation is unclear, many seek new credit to counter future financial risks.
'In uncertain times, customers often expand borrowing to prepare for financial difficulties,' Wise says. However, this leads credit card companies to respond by raising interest rates.
Additionally, Wise emphasizes that as more borrowers have weaker credit, the average interest rate across the system will be pushed higher. 'If the majority of balances belong to risky customers, interest rates will tend to rise,' he adds.
High interest rates do not affect everyone, but most borrowers bear the burden.
Not all credit card users endure these high-interest rates. Those who pay in full each month need not worry about the interest rate. The primary victims are those carrying credit card debt.
Another notable point is that the rate increase only applies to new balances. Therefore, those who have had cards for a long time and have not incurred additional debt will keep their old rates. But new borrowing opportunities, new balances, or new card openings will incur high interest rates, starting from 20% or more.
Some people hope the Fed will cut rates to salvage the situation. However, Charlie Wise states that this is not entirely the case. 'Even if the Fed lowers the benchmark rate by two basis points, the rate would only decrease from 22% to 20%. That's not a significant enough change to alleviate the situation,' he says. And the pain remains.
A good credit score not only helps customers get better loan offers but also overall affects their financial profile. Individuals with high credit scores can easily negotiate better interest rates, and their chances of approval are much higher. Therefore, the higher the credit score, the greater the interest benefits across all loans, from credit cards to large loans.
Source: https://tintucbitcoin.com/lai-suat-the-tin-dung-tang-nhanh/
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