This Sneaky Credit Card Change Cost the Average American About $250 Last Year

A double whammy of higher interest rates and increasing levels of credit card debt means Americans paid over $100 billion in credit card interest in 2022. What’s more, new research from the Consumer Financial Protection Bureau (CFPB) shows that the Fed’s rate hikes are only partially to blame.

The CFPB says the average American paid over $250 last year in extra credit card interest. Which is a lot of money if you’re living paycheck to paycheck.

Credit card companies are profiting from rising balances

In recent years, the Federal Reserve has hiked interest rates to help get inflation under control. The Fed’s high prime rate is one reason it’s so expensive to carry a balance. But it’s only part of the picture. The other is that credit card companies charge additional interest known as APR margin.

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The total average credit card APR reached 22.8% in 2023, almost double what it was a decade ago. The CFPB breakdown shows that 8.5% of that comes from the prime rate. The other 14.3% is the APR margin, currently the highest in recent history.

That’s why the consumer watchdog says credit card companies are profiting from struggling consumers. It’s one thing to charge interest to cover the cost of lending. It’s quite another to make billions of dollars from people who owe money.

According to the report, “For an average consumer with a $5,300 balance across credit cards, the excess APR margin cost them over $250 in 2023.” It says credit card companies earned an extra $25 billion by raising the APR margin.

The difference of a higher APR

The CFPB says the APR margin increased by 4.3 percentage points from 2013 to 2023, at a time when the cost of lending money has remained relatively steady or even declined. Those higher rates make it harder for consumers to pay down debt, in some cases meaning they get stuck accruing more interest and fees that they can’t pay.

Let’s say you owe $5,300 on a credit card and plan to pay it down over two years. We used a credit card interest calculator to work out the monthly payment and total interest charges for different APRs. Here’s how much difference a few percentage points can make to your payments.

Interest Rate Monthly Payment Total Interest Costs
15% $257 $868
20% $270 $1,174
22.8% $277 $1,349

Data source: Author calculations.

How to pay down your credit card debt

Carrying a balance on a credit card is soul destroying. You try to pay it off, but it can feel like you are running just to stand still. Here are some steps you can take to get your debt under control.

1. Make a plan

I’ve been in credit card debt before, and I know how easy it is for months to slide by without turning intentions into action. Sit down and look at your financial situation. Use your income and outgoings to come up with a realistic monthly debt repayment target. Set a reminder in your calendar.

If you owe money on more than one card, the next step is to decide which one you’ll pay down first. For example, you might opt for the debt snowball method and pay the smallest debt first. This is rewarding because the first win is very achievable. Another option is to target the card with the highest interest rate, also known as the debt avalanche method.

READ MORE: How to get out of credit card debt

2. Look for ways to reduce your interest rate

If you can reduce the amount of interest you pay, you’ll have more cash to put toward your balance. If you have a strong credit score, you might be able to switch to a balance transfer card with a 0% introductory rate. You’ll have to pay a transfer fee, and it’s important to look at how long you’ll have to pay off your balance.

Another option might be to take out a debt consolidation loan. The interest rate and terms will depend on how good your credit score is, but you may get a lower rate than you pay on a credit card. You’ll need to commit to fixed monthly payments across a set period.

3. Put as much money as possible toward debt repayment

The more debt you can pay off each month, the less you’ll pay in interest and the quicker you’ll shake that debt. Review your recent spending and look at cuts you might make in the short term. Also, if you have a side hustle or the ability to take on extra hours at work, that could be extra money that goes toward your balance.

I’m not suggesting you live on bread and water and give up everything you enjoy until the debt is paid. It needs to be achievable. Nonetheless, perhaps there are some subscriptions you could go without for a period and other non-essential spending you might be able to drop.

Bottom line

The news that credit card companies are profiting from consumer debt may not come as a huge surprise. If you’re carrying credit card debt, the best way to handle this news is to focus on paying it down.

It may feel like you have a mountain to climb and it may take time. But take heart from the fact that many people have done it. Depending on your circumstances, you may be able to as well. Take it one step at a time and celebrate each month you shrink the amount you owe.

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