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Nearly half of Americans don’t know their current credit card annual percentage rate (APR), according to a new study from LendingClub. (LC) report published on Tuesday.
At the same time, 49.5% of all Americans are unaware that the annual percentage rate on their credit cards increased by more than 5 percentage points when the Federal Reserve raised its benchmark interest rate between March 2022 and July 2023, the financial services company found.
This lack of awareness of the costs associated with credit cards comes as average interest rates in the U.S. are currently at a record high of 22.76% – an increase of 500 basis points in just two years, according to the latest Fed data.
“Unfortunately, many consumers are unaware of these rising costs, and credit card companies are happy to keep it that way,” said Mark Elliot, chief customer officer at LendingClub. “This lack of transparency makes it even more difficult for consumers to manage their finances and get out of debt.”
What is APR?
Simply put, the annual percentage rate of interest on a credit card is the cost of credit.
More specifically, it’s the annual interest rate you pay when you carry a balance on your card, in addition to any other fees associated with the card. This means that the higher the APR on your card, the more expensive it will be to borrow – and conversely, the lower it is, the cheaper it will be.
What is the connection to the interest rate?
Of the 53% of Americans who told LendingClub they know their APR, a third of those respondents were unaware that the rate is directly tied to the prime rate.
Credit cards typically have what’s called a “variable APR,” which means your interest rate can fluctuate over time. These APRs are tied to an underlying index, such as the federal government’s prime rate. If that rate goes up, your card’s APR will go up, too.
The key interest rate is currently at 8.5%, where it has been for more than a year. In March 2020, the interest rate was set at 3.25%. This rate is used by banks to set a minimum interest rate on loans (including credit cards and lines of credit) and varies depending on the Federal Funds Rate.
Meanwhile, the key interest rate has been set at 5.25 to 5.5 percent since July 2023, the highest level in 23 years, after the central bank launched a historic interest rate hike campaign.
Other factors are also taken into account when determining the annual percentage rate, including competitor interest rates, credit scores, income, savings and other creditworthiness criteria.
Rising credit card debt
The average American has $6,329 credit card debtup from $5,947 a year earlier, a sign that people are using up their pandemic-era savings and increasing their use of credit cards.
According to the latest survey by the Federal Reserve Bank of New York, credit card balances currently stand at $1.14 trillion. Household debt and credit reportThat number increased by $27 billion in the second quarter of this year.
Signs of a weakening consumer are already beginning to bubble to the surface. Bank of America (BAC) Chief Brian Moynihan said in an interview with CBS on Sunday that the Consumer spending has halved compared to the same period last year, and is around 3%.
“Consumers have slowed down. They have money in their accounts, but it’s running a little low,” he said. “They’re busy, they’re making money, but … they’ve really slowed down.”
Longer-term higher interest rates and persistent inflation are weighing on consumer spending. To ease the burden on Americans and achieve a “soft landing,” the Fed is expected to make its first rate cut in September.
