Credit card companies are scamming you like never before

Lana Linge has $42,000 in credit card debt, but it’s not the huge payment that frustrates her the most.

The 29-year-old claims that she takes full responsibility for her debt. After getting her first credit card in her 20s, Linge accumulated a small amount of debt, but was always able to pay it off. This changed in 2020: during lockdown, Linge found it difficult to manage her spending on necessities and other items such as clothes, which caused her bills to increase. The situation worsened when she lost her job last October and ultimately depleted her savings to keep up with the payments on the card.

“I know a lot of people get into debt because of weird things that are out of their control,” Linge says. “The reason I’m in debt is primarily due to overspending, and I’m not trying to deny that in any way.”

Overwhelmed, Linge goes through a painful bankruptcy process to pay off her debt. Looking back, she wishes she had paid more attention to the details of her card’s interest rate. Encouraged by the rewards and perks offered by the companies, Linge opted for a card whose interest rate increased, in her opinion, to over 20%. The rising interest meant that even as she tried to control her spending, the bills kept mounting.

Linge may have experience at the end of the American personal finance funnel, but she’s not alone in her interest rate woes. Consumers are always looking for deals, and it’s easy to be fooled by credit card companies offering flashy rewards and points. As Adam Rust, director of financial services at the Consumer Federation of America, told me, issuers are “choosing sizzle over steak.” However, many of these cards come with high rates and hidden fees, and before consumers even know what they’re signing up for, credit card companies have reaped the profits.

“Credit card companies can get away with charging high interest rates because consumers don’t necessarily pay attention and marketing doesn’t focus on it,” he said.

The average credit card interest rate is now just over 21%, up from about 15% a decade ago. More importantly, the gap between the interest rate credit card companies pay to the banks that oversee their operations and the rate they collect is the widest in almost 30 years. Even with existing regulations and the Federal Reserve’s recent interest rate cuts, credit card companies have the power to exploit consumers, and those with growing piles of debt have few options for relief. Additionally, as credit card companies continue to charge high interest rates, more and more indebted cardholders are falling into arrears, which could push the U.S. economy closer to recession.

“What we’re seeing from the data shows a rapidly deteriorating financial landscape for Americans,” Bruce McClary, senior vice president of the National Credit Counseling Foundation, tells me, “with many people teetering on the brink of a serious financial crisis.”

Oppression is on

Americans have a lot of debt accumulated on their little pieces of plastic. The Federal Reserve Bank of New York reported in August that Americans owed a record $1.14 trillion on their credit cards in the second quarter, with balances up $27 billion from the same period a year ago, an increase of 5 .8%. TransUnion says the average credit card balance per debtor is $6,329, up 4.8% from last year. What’s most disturbing is that, according to the New York Fed, the percentage of people who are more than 90 days behind on their payments rose to 6.4% by the end of 2023, up from 4% at the end of 2022. Austan Goolsbee, president of the Federal Reserve Bank of Chicago called these growing delinquencies “uncomfortably high” and a “warning sign” for the economy.

This may be disturbing news for average households and the U.S. economy, but it is great news for credit card companies. Credit card issuers make money in several ways, but one of the most important is through interest payments. If a customer doesn’t pay off the entire balance each month, they’re paying interest charged by the credit card company, so raising interest rates is an easy way to increase your profit.

To better understand the strength of the credit card industry, look at the split between the federal funds rate – the interest rate at which banks make very short-term loans to each other, which is also used as a benchmark for almost every other type of credit card – and the average credit card interest rate. Data from the Federal Reserve of St. Louis point out that the rate differential is the highest in nearly three decades, suggesting that credit card companies are free to charge high interest rates regardless of what the Federal Reserve does with the federal funds rate.

“We should never lose sight of how profitable credit cards are,” Rust says. “You have interest, you have exchange, you have late fees; credit card companies make a lot of money.”

The Consumer Financial Protection Bureau estimated in February that major credit card companies earned about $25 billion in additional interest revenue in 2023 by raising their annual percentage margins, or the difference between the APR and the interest rate set by banks, the so-called basic rate. It also found that major issuers increased their average margin by 4.3 percentage points over the past decade, reaching the highest level on record. Using data on how Americans use their cards to create a representative picture, the CFPB estimated that the margin increase will cost the average consumer with a $5,300 balance $250 more in 2023. Additionally, the bureau’s 2023 report to Congress on credit The payment card market reported that companies charged consumers more than $105 billion in interest in 2022, which helped boost the companies’ profit margin to 5.9% from 4.5% in 2019.

These astounding numbers are made possible by the tactics credit card companies use to attract new customers. Antoinette Schoar, an MIT economist who co-authored a paper examining credit card companies’ use of behavioral biases to attract customers, says companies use data to determine a potential customer’s education level and income and will typically offer products with hidden fees and high rates for people with lower education and income. For example, a company may advertise a 0% APR, but the consumer may not realize that this rate cannot last forever, leading to a higher balance than they can pay off. He says that while the tactics companies use to attract the attention of some consumers can lead to high balances and credit card debt, companies aren’t the only ones to blame – government regulations that prevent this type of misleading marketing by credit card companies could force them to compete by offering customers a better deal.

“We need better regulation to ensure that card companies compete on the right scale, rather than on increasing confusion or confusion for their customers,” Schoar says.

“The highest credit card interest rates we’ve ever seen”

By 1978, most states had laws limiting interest rates on credit cards and consumer products. However, a Supreme Court decision that year allowed banks to charge any interest rate they wanted if they were located in a state without usury laws. This inspired a race to the bottom, with states such as South Dakota and Delaware waiving their regulations to attract more customers to banks. As a result, as David Silberman, a senior fellow at the Center for Responsible Lending, put it, the industry had virtually “no legal limits on the interest rate charged.” Lawmakers have tried to rein in the industry – for example, the Card Act passed in 2009 required card issuers to give consumers at least 45 days’ notice of interest rate increases and placed limits on items such as late fees and withdrawal fees. However, the legislation did not limit interest rates or rate increases.

Reducing the current high interest rates and associated profits has become a priority. GOP Sen. Josh Hawley introduced a bill in 2023 that would cap interest rates at 18% and impose penalties on companies that violate the cap. “Americans are being crushed under the weight of record credit card debt, and the biggest banks are just getting richer,” Hawley said in a statement, adding that “limiting the maximum interest rate on credit cards is fair, common sense and gives the working class an opportunity.” Democratic Sen. Elizabeth Warren raised the issue during a May Senate hearing, arguing that credit card companies “have increased their profits through interest and fees.”

The Federal Reserve lowered its benchmark interest rate in September after keeping it unchanged for more than a year, but credit card holders with high interest rates won’t see any immediate relief. Michele Raneri, vice president and head of U.S. research and consulting at TransUnion, told me this is because consumers must pay off their balances at the interest rate in effect when the debt accrues, so the lower rate won’t apply.

“It will take some time for the consumer to realize the benefits,” says Ranieri.

High inflation over the past few years has also made it easier for consumers to fall into credit card debt. Ted Rossman, senior industry analyst at Bankrate, described the feedback loop of high prices and high interest rates as “a cycle that is difficult to break.” Credit card companies know what they need to do to maximize profit: If they offer rewards and bonuses up front, they can attract new customers before they know what high rates they’re signing up for. Issuers’ profits continue to rise while consumers lag behind.

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Ayelet Sheffey is a senior economic policy reporter on Business Insider’s economics team.

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