Though Fed holds lending rates steady, subprime cardholders continue to feel sting of high interest rates

It looks as though the Federal Reserve is winning its war against inflation, having successfully slowed it gradually over the past year. The threat of lingering high inflation was real for a while after central bank officials initially dismissed the post-pandemic run-up in prices as transitory and remained complacent.

With the Fed no longer inclined to raise its target interest rate to tackle inflation, there may be relief in sight for credit card holders with low credit scores and high APRs. Credit card rates will remain at current highs for a while, but aren’t likely to increase in this economic cycle.

The Federal Reserve’s string of interest rate hikes beginning March 2022 has taken its target rate, to which card rates are tied, to a current range of 5.25 percent to 5.50 percent. At the Federal Open Market Committee (FOMC) meeting on March 20, 2024, the Fed’s rate-setting body decided to maintain its target range for a fifth time. Indeed, it seems the Fed’s next move will be to bring its target rate down later in 2024 if it feels confident it’s won the war against inflation and the economy is not growing hotter.

Credit card interest rates remain high

However, subprime cardholders still must contend with high rates brought about by the Fed’s rate hikes over the last two years.

When the Fed hikes interest rates, credit card issuers typically follow suit with their own APR hikes. That, in turn, means cardholders wind up paying even more interest to borrow money. As of late March 2024, the average credit card interest rate stood at a very high 20.75 percent, according to Bankrate.

“Higher interest rates mean the cost of using credit is more expensive, as consumers will pay more in interest — impacting those with subprime credit, who often carry a balance, more than others,” says Katie Bossler, quality assurance specialist at GreenPath Financial Wellness, a nonprofit credit counseling service.

People with low credit scores tend to be charged some of the highest APRs. FICO credit scores range from a low of 300 to a high of 850, with anything below 670 considered a poor credit score. The Consumer Financial Protection Bureau (CFPB) defines a subprime credit score as anything below 619.

Good news and bad news for subprime borrowers

While the Fed’s rate hikes are done for now, the central bank’s actions are data dependent, and it remains watchful. Some subprime cardholders may be spared any further direct harm from potential Fed interest hikes, says Bruce McClary, senior vice president of communications at the National Foundation for Credit Counseling. For those cardholders, APRs might already be capped at the legal limit, he says. Maximum credit card APRs vary by state.

However, subprime cardholders with APRs below the legal limit might see their interest rates go up in the wake of any Fed action, he says. For instance, if a subprime consumer’s credit card charges a 25 percent APR but the legal cap is 36 percent, a card issuer might see an opportunity to raise the rate.

McClary adds that for a subprime cardholder, an APR hike might be aggravated if the cardholder has recently made late payments or maxed out their credit limit. Both of those circumstances could lead to a card issuer raising your APR. The effect of these soaring interest charges on subprime consumers will likely be much greater than the impact for consumers with higher credit scores.

“The higher likelihood of missed payments adds to the cost of repayment for those most likely to face a strong headwind of financial challenges,” McClary notes.

Subprime card delinquencies have gone up

Credit card delinquency rates — or debt that’s at least 30 days past due — for subprime borrowers had risen to 15.68 percent by the third quarter of 2023, from 11.12 percent in the first quarter of 2022, when the Fed first raised its target rate. Also, with banks tightening lending standards in 2023 for those with lower credit scores, subprime borrowers are finding it harder to qualify for new cards.

Despite this, card debt continues to grow. Card balances rose by $48 billion to $1.08 trillion in the third quarter of 2023, according to the Federal Reserve Bank of New York.

Landscape for subprime general-use credit cards

Subprime borrowers remain at risk

Subprime borrowers are not out of the woods yet, though, in the current economic climate. In June 2022, the U.S. inflation rate had increased to 9.1 percent, the highest rate since 1981. Inflation has cooled since, dropping to 3.2 percent in February 2024, according to the U.S. Bureau of Labor Statistics.

“Many of the people we at GreenPath speak with are looking for ways to cope with inflation,” says Bossler. “The increased prices on everyday essentials from gas to groceries to utilities — and utilizing credit cards for these expenses — can lead to greater financial stress. We’ve seen a heavy need for budgeting and support services. Many of our clients are still facing reduced income and job loss.”

GreenPath has noticed troubling trends among subprime consumers and other borrowers, such as:

• Using credit cards to supplement their income
• Making only the minimum monthly payments on credit card bills
• Carrying high balances from month to month
• Maxing out their credit cards
• Relying on high-interest cash advances

How subprime borrowers can avoid danger

Unfortunately, options for subprime consumers to turn things around are limited, according to Bossler. While someone with a higher credit score might be able to take out a low-interest debt consolidation loan or take advantage of a balance transfer, these solutions may be off-limits for subprime borrowers.

Even if those options are out of reach for now, subprime borrowers can take these steps to stay out of — or get out of — a financial jam with credit card debt:

• Pay at least the minimum due each month. “The longer you carry a balance, the more you pay in interest,” McClary says. Use Bankrate’s minimum payment calculator to see how long the minimum might take you to pay off your balance.
• Pay your bills on time. Payment history represents 35 percent of your FICO score, making it the most important scoring factor.
• Use less than 30 percent of your available credit. The amount of debt you owe compared to your total credit available makes up 30 percent of your FICO score.
• Reduce your credit card debt. Carrying a lot of debt, or carrying balances on credit cards for a long time, can weigh down your credit score. Work to lower what you owe through strategies like debt consolidation or a balance transfer card.
• Regularly review your credit reports and credit scores. The three main credit bureaus allow you to purchase your credit score. You can also request your credit reports for free.
• Let your issuer know. If you think you might miss a payment, contact your card issuer to ask about the possibility of changing your due date or making other payment arrangements.
• Reach out for help. A nonprofit credit counseling agency may be able to help you tackle your credit card debt.