Why credit card interest rates are so high now (and what to do about it)

CBS News

22-04-2025

The U.S. economy is showing mixed signals this spring. Inflation is easing and is
currently at 2.4%
year-over-year (as of the latest reading), but it's still sitting above the Federal Reserve's 2% target rate. And, while interest rate cuts appear possible this year, the rate environment remains elevated for now. Meanwhile, the stock market has been volatile over the last few months.
Credit card debt has been climbing
in tandem as people struggle under the weight of higher prices, expensive debt and other factors, and it's happening despite today's high average credit card rates. According to the latest data, the average cardholder is carrying
nearly $8,000 in credit card debt
at a time when the
average card rate is closing in on 22%
.
But why are
credit card interest rates so high
right now? It has a lot to do with where the economy stands, how the Federal Reserve sets rates and the way credit card companies manage risk.
Find out how to start tackling your credit card debt today
.
Here are a few of the factors that are keeping card rates elevated right now.
Perhaps the biggest reason for high credit card rates is
the Federal Reserve's benchmark rate
— as credit card APRs tend to rise and fall alongside it, experts say.
"When the Fed raises its benchmark rate, borrowing costs increase across the board, including for credit card issuers," says Kristy Kim, a personal finance expert and CEO of TomoCredit. "Since credit cards typically have variable rates tied to the prime rate, any increase by the Fed is quickly passed on to consumers."
The federal funds rate soared in recent years as the Fed worked to curb inflation, and credit card rates increased accordingly. But more recently, inflation has slowly inched downward toward its 2% target.
Despite inflation easing, credit card APRs have stayed near record highs. So why is that happening?
Kim notes that the Fed implemented modest cuts in late 2024, but "they haven't implemented substantial reductions yet, meaning prime rates and therefore credit card APRs remain elevated."
Credit card issuers are often slow to pass along lower rates, especially when the economy is uncertain. They'd rather keep wider profit margins in case more borrowers start missing payments.
Get help with your expensive credit card debt now
.
High delinquency rates
historically lead to higher credit card APRs because lenders raise rates to offset the risk of missed payments. And, delinquency rates are rising, meaning more cardholders are 30 days or more behind on their payments.
The New York Federal Reserve reports that 7.18% of credit card debt
became 90 days or more past due
by the end of 2024, up from 6.36% a year earlier. That's a sign of how hard it's become to keep up with debt, with roughly 48% of American cardholders relying on their credit cards
to cover basic living expenses
.
"When consumers fall behind on payments, lenders will likely raise interest rates or keep them elevated to compensate for the losses," says Leslie Tayne, financial attorney. "When combining potential delinquency rates and missed payments with today's elevated federal funds rates, it's unlikely that credit APRs will decrease anytime soon, even if the economy improves."
Today's high credit card APRs are also attributable to the way lenders assess risk.
"Another key contributor to today's high credit card rates is individual credit behavior, particularly high credit utilization ratios and missed payments," says Kim. "When consumers carry large balances relative to their credit limits or pay late, issuers view them as higher-risk borrowers and often assign higher interest rates as a result."
Kim recommends keeping
your credit utilization
below 20% and always paying your bill on time.
"These habits not only help maintain a healthy credit score, but also signal to lenders that you're a responsible borrower, which can lead to better rates over time," Kim adds.
A large credit card balance can make it hard to stay on budget and lead to higher interest costs over time if you can't pay it down. Here are some practical steps you can take to start lowering your credit card debt:
Credit card rates remain high for several reasons, led by a high Federal Reserve benchmark rate. Even though the Fed has signaled rate cuts this year, they may not be substantial enough to bring down APRs significantly. Instead of waiting for lower interest rates, you may be better off focusing on bringing down credit card debt and considering lower-cost ways to borrow.