When the Federal Reserve raises or lowers interest rates, it always triggers the same question among consumers: How will a rate cut or hike affect me financially?

Declining rates may be seen as a positive for those with a credit card or other high-interest debt. Still, just how much of an impact does a rate decrease—such as the recent 25 basis point drop announced by the Fed—really have on credit card users and their ability to pay back their balances? And why have credit card rates continued to rise, even when other interest rates associated with consumer borrowing have dropped?

These are important questions in light of the current pace of credit card delinquency rates. Taking a closer look at the numbers can help put delinquencies and rates in perspective.

Key Takeaways

  • Credit card delinquency rates have reached their highest point since 2013, in part due to an influx of younger users.
  • The average credit card interest rate is the highest it's been since 1999.
  • Not every credit card company adjusts interest rates to track the federal funds rate, so the recent rate cut by the Fed may not result in a lower interest rate for your credit card.

Credit Card Delinquency Continues to Trend Up

Coming off the heels of the Great Recession of 2008, credit card delinquencies hit a peak in the second quarter of 2009. The delinquency rate reached 6.77% before gradually dropping back down to 2.12% through the second quarter of 2015. Since then, however, credit card delinquency rates have slowly but surely been climbing.

While credit card delinquencies are up, balances are down, dropping from $870 billion to $848 billion through the first quarter of 2019.

As of the first quarter of 2019, the delinquency rate for credit cards issued across all commercial banks had reached 2.59%, according to the Federal Reserve Bank of St. Louis. That marks a high point not seen since the second quarter of 2013. The Federal Reserve Bank of New York pushes the numbers even higher, estimating that 5.04% of credit card balances in the U.S. were at least 90 days delinquent through March 31, 2019. Delinquency rates were highest among cardholders age 18 to 29, reaching 8.05%.

According to the New York Fed, the rise in delinquency rates can be chalked up at least in part to an influx of younger credit card users entering the market. Andrew Haughwout, senior vice president at the New York Fed, acknowledged that credit card delinquencies are above historically low levels, but said that they’re still below pre-financial crisis levels.

Credit Card Rates Also Continue to Rise

The uptick in credit card delinquencies parallels an increase in credit card interest rates that’s taken place over the last several years. According to the St. Louis Fed, the average credit card annual percentage rate (APR) reached a low of 11.82% in August 2014. As of May 2019, nearly five years later, the average credit card rate across all commercial banks had reached 15.13%. That’s a level that hasn't been seen since November 1999.

It’s possible that rising rates could be a contributing factor to the higher delinquency rates. For a borrower who’s just making the minimum payment each month or only paying a few dollars more, a higher APR could make it difficult to make a dent in the principal. If you’re struggling to keep up with other financial obligations—a mortgage payment, medical expenses, or, in the case of younger borrowers, college tuition—keeping up with a credit card payment could get pushed to the back burner.

Credit cards designed for people with bad credit charge the highest rates overall, averaging 25.33%.

So why have credit card interest rates continued to climb even while other rates have dropped? Mortgage rates, for example, have remained near historic lows despite a series of rate hikes undertaken by the Fed beginning in 2015. The simplest answer may be that credit card companies are not required to follow the Fed’s interest rate policy. While some may adjust rates to track movements in the federal funds rate, not every credit card company does.

Credit card interest rates are set based on the prime rate, which is the lowest rate at which banks lend to the most qualified borrowers, and the prime rate is influenced by the federal funds rate.

Will Credit Card Delinquencies Continue to Pile Up?

When consumers are spending on credit cards at a consistent rate, there’s very little incentive for credit card companies to lower interest rates. So even when the Fed decides to lower rates, consumers may see very little tangible benefit where their card’s APR is concerned.

A report from TransUnion suggests that credit card companies will continue to expand credit card availability to subprime borrowers through 2019, which could increase the odds of higher delinquency rates. Subprime borrowers tend to have a riskier credit profile overall, which could make delinquencies a stronger possibility, despite any rate drop.

What You Can Do to Avoid Delinquency

This latest rate decrease could nudge credit card companies to lower credit card rates slightly, but it’s not guaranteed. In the meantime there are some things credit card users can do to manage their balances and minimize the chances of delinquency.

Transferring balances to a card with a 0% APR can cut down on the amount of interest paid. That can also allow cardholders to pay down balances faster when more of their monthly payment goes toward the principal. Revisiting your budget and sticking to a debt repayment strategy, such as the debt snowball method, can also help you stay on top of credit card debt, regardless of what interest rates do.