Credit Card Rates Poised to Hit 40-Year High This Year

Credit card interest rates are expected to reach an average of 20.5 percent by the last week of 2023, up from 19.6 percent in the last week of 2022. This is the highest average seen in 40 years, which is painful for consumers facing increased borrowing costs as the Federal Reserve raises interest rates in its attempts to combat inflation.

“In a weaker economic environment, credit quality tends to suffer as people fall behind or default,” Greg McBride, chief financial analyst at Bankrate, said in an interview, according to American Banker.

Although interest rates have increased, credit card delinquencies have remained low. Consumers have mostly maintained savings and the job market has remained strong, so consumers have been able to keep up with their monthly payments.

For store credit cards, the average annual percentage rate is 26.72 percent. Cards from companies like Bloomingdale’s, Exxon Mobil, Macy’s, and Shell have cards with rates that have exceeded 30 percent.

If the economy contracts and the unemployment rate rises, borrowers could have a more difficult time making payments and lenders could see higher default rates. However, if the job market softens, it would take time before consumers’ financial hardships show up on banks’ credit card metrics.

If the U.S. enters a recession like economists predict, McBride noted that lenders wouldn’t likely be badly damaged, as they have had time to mitigate risks and are much better capitalized now than at the brink of past recessions.

“Banking is a very cyclical business,” said McBride, “but that doesn’t necessarily mean it’s unprofitable in a weak economy—it would just be less so.”