Just when borrowers were starting to get some relief on credit card interest rates, they’ve started to inch back up—a sign that issuers see trouble ahead, particularly among borrowers with poorer credit profiles.
Higher interest rates make it more costly for cardholders to carry a balance, and right now consumers are credit hungry and carrying lots of debt. Banks, seeing increases in delinquencies, are raising borrowing costs to protect against potential losses. Cardholders with not-so-great credit are particularly vulnerable, analysts say.
“Lenders are needing to price in that they are struggling to get the right quality of credit applicants,” David Fieldhouse, an economist at Moody’s Analytics, told The Balance. As a result, “Credit cards are getting very, very expensive [for cardholders].”
Sky high annual percentage rates (APRs) on credit cards did inch down after the Federal Reserve cut the benchmark federal funds rate three times in 2019—the first declines in 11 years. But the brief respite is quickly evaporating. Even as the Fed has kept rates steady in recent months, some credit card issuers have reversed course, hiking APRs higher as credit standards tighten.
What Has Changed
In December 2019 and January 2020, The Balance recorded APR increases on 23 of the more than 300 credit cards it tracks in its database of offers to new applicants: 19 increases on APRs for purchases and seven on APRs for cash advances. (Three of these cards had increases on both APRs.)
The increases were made by some of the biggest U.S. issuers, including Discover, U.S. Bank, Capital One, Chase, and Citibank, and only on select cards. Most of the increases were relatively small, 0.5 to 1.5 percentage points in several cases, but given that the Fed cut its fed funds rate by just 0.75 percentage point in 2019, some APRs are already higher than they were when the Fed began cutting.
In most cases, variable APRs automatically change when the Fed makes changes because banks base these APRs on the prime rate, which usually moves in step with the fed funds rate. Typically, an APR is the prime rate plus a certain percentage.
Often, banks have a range of APRs they charge, such as 13.99% to 21.99%. Some APR increases were on both the high and low ends of the range, others were on just one end of a bank’s range. A few increases were bigger on the high end or only on the high end, which makes those cards disproportionately more expensive for the less creditworthy applicants.
For example, the HSBC Gold Credit Card's variable purchase APR went from 12.49%-20.49% to 14.49%-24.49%. Other cards, such as the Discover it Cash Back and the Discover it Chrome for Students, now just offer a single purchase APR instead of a range based on creditworthiness: Instead of a variable 14.49%-23.49%, an approved applicant simply gets a variable APR of 19.49%.
Still other increases were on cards for people with fair or poor credit scores, including the Capital One Secured Mastercard and the Capital One Platinum Credit Card.
In fact, the average purchase APR of credit cards marketed to those with fair or bad credit (a 669 FICO score or lower) has been trending up since at least September 2019, despite the Fed’s rate cuts, according to The Balance’s database. Between September and January it inched up a quarter of a percentage point to an average 24.97%. Meanwhile, the average APR for cards aimed at consumers with good or excellent credit scores (FICO score or 670 or higher) fell a third of a percentage point to 20.11%.
The Balance has only been tracking new APR offers since September 2019, but Federal Reserve data shows the average APR hit a record high in 2019, before dipping slightly in step with the Fed rate cuts. January data has yet to be released.
Higher Late Fees
Fees for late payments are also inching up, in another sign of banks’ concern about their potential losses. In January 2020, issuers including Citi, First Access, Genesis Bank, and The Bank of Missouri raised select late fees by $1 to a maximum of $40. Comenity, Synchrony, and several other issuers of retail cards also imposed $1 increases on some cards, to either $39 or $40.
The Balance only tracks offers made to new applicants, so to keep tabs on the cost of cards already in your wallet, watch your mail. Issuers are generally required to give you 45 days notice of interest rate or fee increases, unless they’re related to changes in the prime rate. (If you’ve had your account for less than a year, issuers can’t raise them even with notice.)
Who May Get the Brunt of It
Industry experts attribute recent changes to a few factors, none of which are good news for consumers with lower credit scores seeking more credit.
While still pretty low relative to past peaks, the rate of serious credit card delinquencies has been on an upward tick since 2016. Perhaps more importantly, the pace of people moving into delinquency status is growing.
In the fourth quarter of 2019, the rate, or flow, of balances transitioning into serious delinquency—meaning the share of card balances that newly became at least 90 days past due—rose to 5.32%, the highest since 2012, according to Federal Reserve data. In 2016, it was just 3.51%.
Meanwhile, the national revolving debt balance (which is primarily made up of credit card debt) soared to an all-time high of $1.098 trillion at the end of 2019, according to the latest Fed data.
“As an issuer, you start to look at that and say, ‘are we offsetting our risk enough?’” said David Shipper, a senior analyst for market researcher Aite Group who focuses on credit cards.
The biggest worry is among borrowers with fair or poor FICO credit scores under 669—or “subprime” borrowers, as they’re sometimes called.
Looking ahead to 2020, most banks were expecting a deterioration in credit card loans to subprime borrowers, but not borrowers with better credit profiles, according to the Federal Reserve’s latest survey of senior loan officers at banks. In fact, of any type of loan, card and auto loans to subprime borrowers were the areas they were most concerned about.
“When we look through our data that is coming in from Equifax, we have seen the largest rises in the 60-day delinquency rates on the subprime accounts,” Fieldhouse said. “Lenders that are making subprime loans are seeing losses rise dramatically.”
Subprime borrowers have above-average credit card balances, according to the credit reporting agency Experian, so they are disproportionately affected when borrowing costs rise.
Besides raising rates and fees, banks are being more cautious about who they lend to and how much they lend. According to the Fed’s survey of senior loan officers, many banks increased minimum credit scores required for new credit card applicants and reduced credit limits in the fourth quarter of 2019.
“We saw tightening all the way through 2019 and that has continued in 2020 so far,” Fieldhouse said. Lenders, facing rising delinquencies, “need to charge more to compensate for that risk if they can’t get the scoring mechanism right.”
A new FICO credit scoring model may actually help card issuers judge consumer creditworthiness more accurately. To learn more, read “FICO Score Changes Will Hit Debt-Burdened Consumers Hard—Eventually.”
Accounting Changes in the Wake of the Financial Crisis
At its core, lending money through credit cards is a financial risk for banks. Sure, they’ve been promised repayment, but there’s no guarantee—and no collateral. This risk is always factored into the interest rates they charge, but there’s another reason banks are being more conservative right now, in addition to the recent delinquency trends.
In response to the losses incurred in the financial crisis of 2008, the accounting standard for calculating how much to anticipate in loan losses has changed so banks are better prepared. The change is just now taking effect.
Until recently, banks used U.S. Generally Accepted Accounting Principles (GAAP) and in essence, relied on historical data, explained Fieldhouse. We should think of it like, “This is how much we lost back then, so here’s how we are pricing our loans and cards now to make up for it,” he said.
But as of Dec. 15, 2019, banks must use the Current Expected Credit Loss (CECL) method to estimate allowances for credit losses. This method relies on a broader set of data, including past events, current conditions, and supportable forecasts. In essence, CECL requires lenders to estimate what might be lost over the lifetime of a loan or card product, according to Fieldhouse. Think of it like, “This is how much we might lose, based on what borrowers are doing right now,” he said.
“They’ve had to increase their reserves quite dramatically, and that’s putting additional pressure on price,” he said.
Late Fee Maximums
The higher late fees are another way issuers are pricing in greater perceived risk. Regulations let credit card issuers increase the maximum penalties for late payments relatively regularly (they are evaluated each year for inflation updates by the Consumer Financial Protection Bureau) but raising them has administrative and relationship costs, so it’s not a given that issuers will. The latest adjustments, which took effect Jan. 1, allow credit card issuers to charge an extra $1, up to $29 for the first late fee, and up to $40 for additional late fees.
Since card issuers didn’t have to adjust late fees, those that did are clearly trying to head off trouble ahead, said Shipper.
“If you think about risk again, late fees are just another indicator of risk,” he said. “We will also soon see issuers look at other fees, like those associated with cash advances, to see if there are additional ways to increase risk protection.”
What All This Means for You
Industry experts predict more increases in APRs. Delinquency rates are likely to worsen, particularly among those with lower credit scores who are already in over their heads. And the new accounting rules will continue to trickle through to consumers. Plus, the Fed hasn’t lowered its benchmark rate in months, and the pace of economic growth is leveling off. The closer we get to a potential downturn, the more banks will tread carefully.
“That’s when issuers experience losses, and they will probably try to get ahead of that,” Shipper said.
If you carry a balance on your credit card month-to-month, this is the time to work on paying it off. And if you have a less-than-stellar credit history, try to get ahead of the credit tightening by working on your credit score.
Spending within your means, making on-time monthly payments, and paying down lingering card balances are among the best things you can do for your financial health.