Households are struggling to make ends meet due to the compounding difficulties of elevated costs leftover from years of inflation, rising housing costs, and years of wage stagnation. As expenses continue to increase, many Americans turn to credit cards to help bridge the gap.
However, credit cards have one of the highest interest rates of any consumer lending product, sometimes causing debt to snowball quickly.
Data from the Federal Reserve Bank of St. Louis shows that credit card and loan delinquencies have increased since 2022, an indicator of the growing financial strain on consumers.
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Credit cards typically carry an interest rate averaging over 20%, making accrued interest a significant factor in mounting debt levels. While more competitive interest rates are offered to consumers with good credit, a few factors shape credit card interest rates.
The federal funds rate, market conditions, credit history, and the type of card being applied for determine an individual's credit card interest rate.
The Fed’s recent interest rate cuts — and future rate cuts — will be crucial to lowering historically high credit card debt and interest rates.
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Credit card interest rates will drop for some, but not all
Household debt rose to $17.94 trillion in Q3 2024, with mortgage and credit card debt accounting for the most significant balance increases. According to the Consumer Financial Protection Bureau (CFPB), credit card interest margins were at an all-time high last year.
As of November 2024, the average credit card interest rate was 21.5%.
Lenders typically use the prime rate — based on the federal funds rate — as a benchmark for interest rates on credit cards, home equity loans, and auto loans. Therefore, the Fed’s decision to cut, hold, or raise rates this year should trickle down to credit card interest rates.
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Bankrate Chief Financial Analyst Greg McBride predicts credit card interest rates to mirror the reduced federal funds rate, though consumers should expect a delay in seeing lower rates offered.
“For those with existing credit card debt, the important thing to know is that your rate will follow the Fed, stair-stepping down in response to the three cuts in benchmark interest rates I expect in 2025 – albeit with a lag of up to 3 months,” he wrote in a statement to TheStreet.
However, the interest rates offered will vary depending on an individual’s credit score and payment history, so unfortunately, every consumer may not see a difference in their interest rate.
“If you’re applying for a new card and have a lower credit score, you won’t automatically see lower rates as issuers price riskier borrowers differently with delinquencies at a 13-year high.”
Credit card debt delinquencies are rising with interest rates
Lower credit card interest rates would be a welcomed relief to the 48% of Americans who carry a card balance month-to-month, but the difference may be marginal.
While millions of consumers struggle to repay card balances with mounting interest payments, credit card issuers have been making record profits. The CFPB has noted that credit card interest rates are based on a combination of the prime rate — the best indication of the bank’s actual cost of funding, currently 7.5% — and the bank’s set APR.
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While banks' lending costs have increased, their APR margins have doubled since 2013. This increase has allowed banks to create significant returns, but often at the expense of consumers’ financial health.
Credit card and loan delinquencies have been on the rise since the onset of rapid inflation in mid-2022 and have yet to come down. 3.5% of all debt is in some stage of delinquency, and rates are far higher for credit cards.
Over 7% of all credit card debt is at least 90 days delinquent, a 2% increase from 2023.
It’s clear that consumers have been struggling with mounting expenses, rising prices, and snowballing debt. As the federal funds rate and prime rate drop further, those with good or even fair credit may see a reduction in their credit card interest rates this year.
Related: Veteran fund manager issues dire S&P 500 warning for 2025
