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Financial Services Law Insights and Observations

CFPB reports on credit card interest rates

Federal Issues CFPB Consumer Finance Credit Cards Interest CARD Act

Federal Issues

On August 12, the CFPB released a blog post analyzing factors affecting high credit card interest rates. According to the Bureau, over 175 million Americans have at least one credit card and nearly half of active credit card accounts carry a balance. The Bureau noted that reforms in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) “advanced competition and saved consumers billions of dollars by restricting harmful back-end or hidden pricing practices,” however, “after the market adjusted to these changes, credit card interest rates have increased despite falling charge-off rates, a stable share of subprime cardholders, and a historically low prime rate.” The Bureau further noted that credit card interest rates increased following the Great Recession, even though several industry indicators suggested the risk of credit card lending has fallen to an all-time low. Regarding subprime accounts, since 2015, the share of credit card holders with subprime scores has remained stable, representing less than one-fifth of total accounts. Therefore, high rates persist even though presumably riskier subprime loans have not increased. Regarding prime accounts, the Bureau noted that “[c]ompared to other lending products, credit card pricing appears to be less responsive to macroeconomic trends like changes in the cost of funds – a measure of how much banks spend to acquire money to lend to consumers – as represented by the prime rate.” As for credit card profitability, the Bureau suggested that the apparent mismatch between credit card interest rates and the risk and cost of lending may explain part of the market’s profits. The Bureau further explained that in 2021, large credit card banks reported an annualized return on assets of near seven percent, which was the highest level since at least 2000, and “[w]hile credit card portfolios have higher rates of defaults than other consumer lending products, it is unclear whether these factors fully account for revenue from high interest rates.” The Bureau also noted that because six credit card issuers account for more than two-thirds of total balances every year since 2005, the CFPB plans to assess whether this is the result of “trends, like increasing rewards and high switching costs, or the result of anti-competitive practices.”

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