The Fed cut interest rates but some credit card APRs haven’t gone down

Synchrony and Bread Financial, which both issue store-branded credit cards, have said that the moves were necessary following a Consumer Financial Protection Bureau rule limiting what the industry can charge in late fees.

“One of the unintended consequences of trying to impose limits on fees is that it often leads to higher rates,” said Greg McBride, chief financial analyst at Bankrate.com.

Card issuers are mitigating their exposure against borrowers who may fall behind on payments or default, he said.

“Reducing the late fee doesn’t reduce the likelihood of a late payment so issuers are going to compensate for that risk in another fashion.” McBride said.

“It doesn’t surprise me that card issuers would try and get out in front of these changes,” said Matt Schulz, LendingTree’s chief credit analyst. The CFPB’s new rule takes a bite out of what has been a very profitable business.

Further, “stores want to be able to offer that card to anyone who walks up to the checkout counter and there is a fair amount of risk in that,” Schulz said.

Only consumers who carry a balance from month to month feel the pain of high APRs. And higher APRs only kick in for new loans, not old debts, as in the case of new applicants for store cards or new purchases.

“Rates are not going up on an existing balance,” McBride said.

APR changes only affect the whole balance if the change is due to a change in the underlying index, such as an increase or decrease in the Fed’s benchmark, he explained.

“Otherwise, if the issuer wants to raise the rate — which would mean increasing the margin over prime rate — they can only do so on an existing balance if the cardholder is 60 days delinquent,” McBride said.

However, credit card delinquency rates are already “elevated,” with 8.8% of balances transitioning to delinquency over the last year, and the share of borrowers with revolving balances rising as more people rack up new debt over the holidays.

Currently, Americans owe a record $1.17 trillion on their cards, 8.1% higher than a year ago, according to the Federal Reserve Bank of New York.

McBride advises consumers against signing up for a store credit card with a high rate during the peak shopping season.

“Store cards are so popular this time of year,” he said. “Having that same-day discount dangled in front of you is tempting, but you lose the benefit of the discount really fast if you start carrying a balance.”

As a general rule, “the best way to avoid these sky-high rates is to pay your bill in full every month — that is easier said than done, but should always be the goal,” Schulz said.

Cardholders who pay their balances in full and on time and keep their utilization rate — or the ratio of debt to total credit — below 30% of their available credit, can also benefit from credit card rewards and a higher credit score. That paves the way to lower-cost loans and better terms going forward.

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