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Bankrate has been tracking credit card rates since 1985, and as 2023 draws to a close, they’ve never been higher. As of December 27, 2023, the average credit card rate was 20.74 percent. That figure has jumped 4.44 percentage points since the beginning of 2022 — the most we’ve ever seen in a two-year span.
Where are credit card rates headed in 2024?
Some relief is coming in 2024. Bankrate’s chief financial analyst, Greg McBride, anticipates that the Federal Reserve will implement two quarter-point rate cuts in 2024. That said, he believes the average credit card rate will fall a bit more than that, as he thinks the U.S. economy will avoid a recession. “The soft economic landing will bring more new card offers and introductory rates into the market,” McBride adds.
“Even though the average rate will remain above the 20 percent threshold for most of the year, a stable economy and falling interest rates mean low-rate balance transfer offers will persist, providing the best escape hatch from high-cost credit card debt and propelling debt repayment efforts.”
At the end of 2024, McBride forecasts an average credit card rate of 19.90 percent.
- Highest average credit card interest rate in 2023: 20.74 percent (Dec. 27, 2023)
- Lowest average credit card interest rate in 2023: 19.59 percent (Jan. 4, 2023)
- Forecasted average credit card interest rate for the end of 2024: 19.90 percent
What happened to credit card rates in 2023?
The Federal Reserve’s Federal Open Market Committee has raised the federal funds rate 5.25 percentage points since March 2022 in an effort to fight the highest inflation readings in four decades. The theory is that higher interest rates will slow economic growth and bring inflation back down to the Fed’s 2 percent target.
The strategy is working: The Fed’s preferred inflation gauge (known as Core PCE, which excludes volatile food and energy prices) has fallen from 5.6 percent (year-over-year) in Feb. 2022 to 3.5 percent in Oct. 2023. The drop in headline inflation (which includes food and energy) has been more dramatic: from 9.1 percent (again, year-over-year) in June 2022 to 3.1 percent, according to the Consumer Price Index.
Average credit card interest rates have fluctuated with these changes, ranging from a low of 19.59 percent to a high of 20.74 percent in 2023.
How Fed changes impact cardholders
All of these numbers affect credit cardholders because interest moves made by the Fed typically pass through to most cardholders within a month or two. Most credit cards have variable rates pegged to the Prime Rate (which is the interest rate that banks charge their most creditworthy customers; it tends to be three percentage points higher than the federal funds rate which is what banks pay each other). A typical credit card rate formula is the Prime Rate plus 12 percent or so.
Because of all this, most cardholders who carry balances are paying 5.25 percentage points more than they were in early 2022, since that’s how much the Prime Rate has gone up. The national average hasn’t moved quite that much for a few technical reasons. For example, it reflects new card offers, which can be different from what existing customers are offered — and federally chartered credit unions can’t charge more than 18 percent by law.
Next steps for consumers
In some respects, it doesn’t matter all that much if your credit card charges 21 percent, or 20 percent, or 19 percent interest. These are all big numbers. The average credit card balance is $6,088, according to TransUnion. If you only make minimum payments toward $6,088 at 19.90 percent, you would be in debt for 212 months and would owe $8,676 in interest. That’s not much of an improvement over the 214 months of debt and $9,072 in interest the current average of 20.74 percent would cost you (assuming you made minimum payments).
In other words, if you have credit card debt, don’t expect the Fed to ride to your rescue. Credit card rates will likely remain high for the foreseeable future. If you can, pay your credit card bills in full each month. Doing that avoids interest charges and enables you to take full advantage of credit card perks such as cash back and travel rewards.
Of course, it doesn’t make sense to pay 20 percent in interest just to earn 1, 2 or even 5 percent in cash back or airline miles. If you have credit card debt, a better approach would be to sign up for a credit card with a generous 0 percent introductory APR on new purchases and balance transfers. The longest introductory promotions are interest-free for up to 21 months. Consider dividing what you owe by the number of months in your 0 percent term and trying to stick with that level payment plan. Adding new purchases forces you to hit a moving target and makes it more likely you’ll still have a balance remaining after the promotional term ends.
As they say, credit cards are like power tools: They can be really useful or dangerous. It’s all about how you use them. With interest rates poised to remain high in 2024, your credit cards are probably charging you higher interest rates than any of your other financial products. Strive to pay in full each month so your cards are working for you, rather than the other way around.
Have a question about credit cards? E-mail me at email@example.com and I’d be happy to help.