Know what an APR margin is? If you have credit card, it’s likely driving up your interest rate

You’ve probably heard of junk fees, as well as credit card late fees – the onerous banking fees you may incur as a credit card consumer.

But there’s a lesser-known factor that could be driving up your credit card costs and placing your household at risk of further debt, as total U.S.credit card balances now stand at a staggering $1.13 trillion – a record high.

This driver of high interest rates is known as the annual percentage rate margin – APR margin for short – and it is the additional interest credit card companies tack on beyond the prime rate. Banks use the prime rate, which is considered a stand-in for the cost of lending. So the APR margin is how credit card companies drive up their profits. Combined with the prime rate, this is your total credit card interest rate, known as the APR.

APR margin rates have reached an all-time high, according to the Consumer Financial Protection Bureau. The agency says this rise in the APR margin has contributed to roughly half of the swelling of credit card interest rates over the past decade.

The consumer watchdog agency says a deceptive credit card shopping process and lack of competition in consumer credit markets only exacerbates the problem.

On Feb. 29, the agency issued guidance to law enforcement and regulators on credit cards and other consumer products. The agency provided information on deceptive user experiences and potential anti-competitive business practices in the credit card industry. The bureau added that it is still working on a public-facing tool for consumers that would make it easier to compare credit card interest rates.

Between 2015 and 2022, the average APR margin increased 1.6 percentage points for someone with an excellent  credit score – 800 or above – despite no rise in late payments. The cost of an excess APR margin to the average credit card holder in 2023 totaled more than $250, the agency said.

One of the problems with this rise in APR margins is that it can “push consumers into persistent debt,” and possibly even delinquency, the brief stated. The Consumer Financial Protection Bureau defines “persistent debt” as charges for interest and fees that are more than half the payment amount within a year.

At the same time, consumers have been hit by changes in the federal funds rate, which is set by the Federal Reserve, and influences the prime rate used by banks, contributing to higher credit card rates. The Fed hiked interest rates starting in March 2022 and the central banking system began to hold rates steady late last year. Despite these changes, the watchdog agency says more attention should be paid to the rising APR margin.

“That margin is what’s been going up over the years. The CFPB says the interest rate on your credit card is going up, not because of the Fed rate, but because the margin that they slap on top of the index rate has been increasing over the years,” said Chi Chi Wu, senior attorney at the National Consumer Law Center.

In February 2022, consumers paid a 16.17% interest rate compared to November 2023, when they paid a 22.75% interest rate on credit cards, according to the Fed. In the last few months of 2023, delinquency rates increased 8.5% for credit card balances and rose for all age groups.

“This signals increased financial stress, especially among younger and lower-income households,” said Wilbert van der Klaauw, an economic research advisor at the New York Fed.

Part of the problem with these high interest rates is that consumers don’t have enough options, there is a lack of transparency on rates when shopping for credit cards, and current regulations aren’t up for the task of reining them in, Wu said. The Consumer Financial Protection Bureau also pointed to consolidation of the credit card market and less transparency from banks on interest rates when consumers shop. The top 10 issuers for credit cards make up more than four-fifths of credit card loans.

Wu said people also shop on rewards rather than on interest rates because consumers don’t have enough information on rates.

“Why do people shop on rewards? Is it just that they’re so much more valuable? Well, no. You can’t shop on interest rates,” she said. “You have to look at the credit card registration and you try to look at what the interest rate is.”

Banks may provide a range of interest rates or multiple possible rates but the consumer won’t know what the interest rate is going to be until after they have already applied because it will be based on their credit score, Wu explained. That allows banks to increase the rate to something as high as 28%, she said. Meanwhile, the credit card rewards are the least regulated aspects of credit cards.

Customers can’t rely on the law to stop banks from charging very high interest rates because there isn’t a limit on interest rates in the Credit Card Accountability Responsibility Disclosure (CARD) Act, a federal law passed in 2009. Many state laws don’t protect credit card consumers in this way either and companies are often chartered in states that don’t have strong usury caps or any usury caps, such as South Dakota and Delaware. These companies don’t have to follow the usury law of the state they’re doing business with customers in — only the state they’re chartered in, Wu explained.

“There’s no federal law that says you can’t charge above 36% which is sort of like the cap we think should be for all small loans,” Wu said.

A Senate bill, the Veterans and Consumers Fair Credit Act, which was introduced in 2021, would have implemented this consumer protection. Ultimately, it did not pass.