Carrying a balance on a credit card has become much more expensive

Banks have been raising credit card interest rates for years, and some are raising them even higher, to recover revenue they fear will be lost under the new late fee cap. That means cardholders struggling to pay their bills may not see much, if any, relief, even as the Federal Reserve is expected to continue lowering interest rates.

The average credit card interest rate was 21.5% in May, hovering around the highest level reported by the Fed since 1994. The average balance people had in the second quarter was about $6,300, a 31% increase from the same period in 2021, according to the TransUnion report.

The Consumer Financial Protection Bureau earlier this year finalized a cap on $8 late fees, saying banks were exploiting the loophole to get around a ban on excessive fees. The agency says if a payment is late by even a few hours, fees can be as high as $41.

Banking and business groups sued to block the restriction, and a Texas judge halted its implementation in May, just before it took effect. This rule remains out of court, but card issuers and banks are already raising rates and charging new fees to offset any potential losses.

Republican presidential candidate Donald Trump proposed a temporary cap on interest rates to 10% last month, though his campaign provided no details on how he would achieve that.

A fresh look at card balances and delinquencies will come next week when JPMorgan Chase and Wells Fargo report third-quarter bank results.

Faint hopes for relief

During an April earnings call, Capital One CEO Richard Fairbank said capping late fees would significantly impact his company’s financial results. He said Capital One is already starting to implement “mitigation actions,” without disclosing details.

Bread Financial, whose customers gravitate toward lower yields than larger banks, said the same month that it had gotten rid of its 29.99% “soft cap” ahead of the new rule. The bank also announced other actions, such as charging additional fees.

Synchrony, another card issuer whose customers skew toward lower-income earners, raised the interest rate on one of its store cards to as high as 34.99% this spring and introduced a $1.99 fee per paper statement for some card programs.

Meanwhile, the Fed’s rate cuts only apply to a portion of prime-rate credit card rates. The additional interest charged by card issuers makes up the majority of fees charged to customers. This additional interest last year reached the highest level in the past decade, according to a February CFPB report. The American Bankers Association said rising interest rates in recent years reflect the growing number of subprime borrowers that issuers have been taking advantage of since the 2008 financial crisis.

A lucrative fee

According to the CFPB, credit card holders pay approximately $14 billion annually in late fees. The agency estimates that capping late fees would reduce that amount by as much as $10 billion.

For the largest banks in the country, credit cards are still a cash cow. JPMorgan, which released its results on Friday, said revenue from card and automotive services in its consumer and social banking division rose 14% to $6 billion in the second quarter from a year earlier.

American Express, known for wealthier cardholders, reported more than $2 billion in revenue from annual card membership fees, up 15% from a year earlier. Total revenue increased 8% to $16.3 billion. Amex will report third-quarter results later this month.

Whether the $8 late fee cap will weigh on card issuers’ bottom line may depend on the presidential election. The CFPB is more likely to continue its insistence if Democratic nominee Kamala Harris wins, TD Cowen analyst Jaret Seiberg wrote in a note.

The Trump campaign did not respond to a question about where it stands on the hat.

Write to Angel Au-Yeung at [email protected]