Deflate Your Rate: How To Lower Your Credit Card APR

3/27/2002

Executive Summary

At the end of the year 2000, U.S. households were accruing interest on $574 billion of revolving credit card debt, or debt carried over to the next month rather than paid off entirely. The average household with a credit card balance carried revolving debt of nearly $10,000. A household making the minimum payments—commonly only two percent of the unpaid balance or $20, whichever is greater—on this debt would pay nearly $1,500 in interest just in the first year. Nationally, consumers pay interest of more than $87 billion annually on this revolving debt. Cardholders paying only the minimum balance accumulate interest on top of interest, paying far more than their share to credit card companies.

An estimated 55-60 percent of Americans carry credit card balances. One recent study found that nearly half of those with balances made just the minimum payment in February 2002. This means that about one out of four cardholders in the U.S. now make only the minimum payments. In the same month, about 37 percent of Americans who could not pay off their balances paid less than half their outstanding balance, and only 13 percent of consumers with an outstanding balance could afford to pay more than half the balance.

While American consumers accumulate more debt, between 1995 and 1999 the credit card industry's profits rose by 274 percent, from $7.3 billion to $20 billion. In addition to keeping interest rates high, the industry has increased its income from late payment fees and over-the-limit fees, among others. In 2000, fee income accounted for 25 percent of credit card companies' total income, and between 1995 and 1999, total fee income increased by 158 percent, from $8.3 billion to $21.4 billion.

Further, the industry increased its bottom line (at the expense of consumers) by not passing along massive decreases in its own "cost of money" when the Federal Reserve reduced the prime rate. In the past year alone, the Fed has reduced the prime rate eleven times (from a high of 9.5 percent on May 17, 2000 to a low of 4.75 percent on December 12, 2001), yet average credit card rates have remained at or around a 14 percent annual percentage rate (APR). Many variable rate credit cards—cards with APRs that fluctuate with the prime rate—now have invoked "floor rates." Since early 2001, many variable rate card companies have refused to reduce their APRs as the prime rate fell, arguing that their contractual floors have been reached.

In response to these shocking statistics and the lack of government action to protect consumers, the state PIRGs investigated whether consumers could fight back on their own against unfair and unreasonable credit card interest rates. Deflate Your Rate reports on our study and offers consumers ways to lower their credit card interest burden.