Think Your Credit Card Bill Is Too High? Here’s Why

Think Your Credit Card Bill Is Too High? Here’s Why

With all the talk about a slowing economy and President Trump’s push for lower interest rates, you may believe that banks and other lenders are making loans more affordable.

Regrettably, that’s not the case.

In fact, the country’s commercial banks have recently raised their average credit card interest rate by a substantial 50%, from 14.5% to 21.5%, making the debt burden of the average consumer that much more intolerable.

So, at just the time that inflation has driven many Americans to reach for the “plastic,” to make ends meet, the lenders have driven interest rates higher. Further, this will have a profound effect on our economy. Today, nearly one-quarter of a billion dollars in annual interest charges are extracted from consumers’ wallets, which is double the rate of just three years ago.

If it seems like you don’t have enough money to go around, you’re right. Commercial bank credit card charges have nearly doubled, from an aggregate charge of $116 billion in 2022 to $239 billion today. As an economist, Lacy Hunt notes, that’s a deadweight drag on our economy.

A reduction in disposable income that could otherwise be used to purchase goods and services to drive economic growth is now being sidelined to pay increasing credit card interest.

What’s worse, this is only the hike in interest charges at commercial banks; other non-bank lenders are excluded from this calculation, so the total credit card interest charges are even greater.

How did we find ourselves in this situation? It’s an interesting story – one that’s full of misdirection and lingering “fixes” that should have been phased out long ago.

The proximate cause of today’s higher credit charges was the Federal Reserve Board’s interest rate hike in March 2022. Although there was no direct connection between the Fed raising its base lending rate and credit card interest, banks are free to increase credit card rates at their discretion. Nonetheless, the Fed’s move provided the banks with the “cover” to also raise their credit card rates.

As the Fed raised its base rate (Fed Funds Rate) by 500 basis points, commercial banks followed suit, hiking their average credit card rate by 700 basis points, adding a little extra padding for good measure.

Now, the banks can always justify this increase in their rates (the “padding”) to a heightened default rate. And it’s true, as sure as night follows day, as interest rates increase, so too do the number of borrowers who can’t make their monthly payment. In other words, as lenders squeeze their borrowers, some of those borrowers are pushed past their limits and, unfortunately, miss their required payments. We all know the story.

Currently, the Fed reports that just over 3% of all credit card loans are delinquent, meaning borrowers are unable to make their monthly payments on time. It is double the rate of 2021, when those “stimulus” checks helped us all pay off our debts.

It’s easy to assume that those credit card defaults are due to the unfortunate circumstances of the borrowers. That something in their life, a loss of a job, a death in the family, and subsequent loss of income, or other tragedy has befallen those in default.

After all, in today’s modern economy, with readily available credit and easy internet access, few borrowers are likely to default on their loans. Indeed, in regular times that’s the case. Our current benchmark of a 3% default rate is close to the historic average rate.

However, we are no longer living in “average” times. For thirty years, the highest bank credit card interest charge was 16%; today it’s 21%. In simple interest terms, you’re being charged a rate that’s 1/3rd greater than at any time in three decades.

But it’s much worse than that. Credit card charges are compounding. That’s to say that you are being charged interest on interest. This month’s interest will incur an interest charge next month unless it is paid off. What’s more, special charges, like late payments or below minimum payments, will also be charged a “fee” – a special rate that is added to your overall credit card debt.

Please make no mistake, the objective here is NOT to support those of us who utilize credit cards. It’s to protect the banks and other credit card lenders.

Like much of today’s financial regulations, these historically high interest rates came as a seemingly innocent reform passed years ago. The year was 1980, and as President Jimmy Carter was leaving the White House, he signed into law the Depository Institutions Deregulation and Monetary Control Act – an incredibly sweeping piece of legislation that, among many other things, allowed lenders to charge any interest rate they chose.

Talk about a bolt from the blue, this was as revolutionary a new regulation as the banks had ever seen. After suffering through the high inflation of the 1970s, banks would now be “protected,” allowing them to charge borrowers at any rate. Who cares if the borrower (you and I) would sink? Let’s make sure those banks are okay.

If it’s beginning to seem like the weight of the entire financial system rests on your shoulders, you’re right.

After the DIDCA passed, it made most of the State’s Usury Laws obsolete. Why limit bank interest charges in your state? The banks might move elsewhere. That’s just what happened. Have you ever wondered why so many bank credit cards are located in South Dakota? That’s right, South Dakota is the only state that has no Usury Laws at all.

So, for today’s credit cards, the sky is the limit. Lenders in the right jurisdiction, like South Dakota, may charge with no limit. The greatest charge I’ve seen is 35.99%. That means that if someone makes just the minimum payment per month, their credit card debt will double in less than three years – at which point the bank will have received back, in monthly payments, their entire loan amount.

Our credit card system is out of control, a wild, wild west system that protects the lender while punishing the borrower. Nearly two-thirds of our economy is based on the American Consumer’s purchase of goods and services. Many of those purchased are made through credit cards and other loans.

As interest rates rise, an increasing number of consumer-borrowers fall by the wayside, unable to meet their monthly payments. Calculated as loan defaults, the number of consumers who cannot pay their “bills” is increasing – this will have a profound effect on aggregate demand.

It is time to worry less about bailing out the banks and more about providing a reasonable interest charge for the consumers.