Contrary to showing anti-competitive behavior, as the CFPB misreads the data, credit cards are a competitive sector that has expanded credit access.
By Jess Sharp
ABA Data Bank
The Consumer Financial Protection Bureau recently reported that credit card interest rate margins — the difference between average APR and the prime rate — have increased in recent years. Based on its analysis of Federal Reserve consumer credit data, the CFPB concludes that APR margins are “excessive” and anti-competitive pricing behavior is to blame. While it is true that APR margins have increased, the CFPB ignores the root causes for this development. As a result, its conclusion that “high levels of [market] concentration…explain why credit card issuers have been able to prop up high interest rates to fuel profits” is demonstrably false.
The widening APR margin is driven by three factors:
- An increase in the number of subprime accounts, which have higher APRs that reflect their credit risk.
- A rise in revolving accounts, especially in the subprime tier.
- A shift away from imposing annual fees on subprime accounts in favor of upfront pricing via the APR.
Combined, these forces illustrate how issuers have expanded access to credit cards after nearly 50 million subprime and prime accounts were closed in the aftermath of the 2008–09 recession, and are pricing risk accordingly. Rather than a reflection of anti-competitive behavior, the growth that has occurred in the credit card market over the last decade is evidence of a well-functioning and highly competitive industry making good on its commitment to expand access to affordable and sustainable credit to an increasing share of U.S. households.
Increase in the share of subprime accounts
The main cause of widening APR margins in recent years is the growth in subprime account volume. By definition, subprime accounts are riskier than prime and super-prime accounts, and as such they are typically associated with higher interest rates. According to Argus Advisory Services, the number of subprime accounts (defined as accounts with credit scores below 680) has more than doubled over the last decade (+113 percent), expanding at nearly twice the rate of prime accounts (+65 percent) and nearly three times the rate of super-prime accounts (+44 percent). Subprime accounts still comprise the smallest share of the market, but as their market share has grown, their influence on APR margins has increased.
In addition to the rising share of subprime accounts putting upward pressure on the APR margin, the relative degree of riskiness within the subprime tier has also affected the APR margin. Specifically, according to Argus data, the APR margin for subprime accounts rose by 3.1 percentage points from 2013 to 2023, roughly three times more than the change for super-prime accounts. This suggests the subprime accounts opened over the last 10 years have been somewhat riskier than the subprime accounts already active in 2013, and thus require a larger risk premium.
Increase in revolving rate
CFPB’s analysis focuses on the average APR for credit cards assessed interest (that is, accounts that revolve credit). As a result, some of the rise in the APR margin observed by CFPB over the last decade is attributable to the increase in the share of revolving accounts. According to Argus, the share of revolving accounts jumped from 41.7 percent in Q4 2013 to 45.7 percent in Q3 2023, representing the highest share of revolvers since 2011. Of the accounts that revolve, 42.3 percent are subprime, an increase of 7.6 percentage points from 2013. At the same time, the share of revolving accounts that are super-prime has fallen by roughly 4 percentage points over the same time horizon (from 27.7 percent in 2013 to 22.8 percent in 2023).
Because a larger share of accounts revolve, and because that change is driven by subprime accounts, it follows that the APR margin for accounts assessed interest would rise accordingly. Contrary to CFPB’s claims, however, this result is not due to “excess APR margins” or anti-competitive pricing behavior, but instead is due to simple market forces: there are more subprime accounts in the market, those accounts have higher APR margins due to the increased risk they pose to issuers, and they revolve at higher rates.
A shift to upfront pricing
CFPB has long advocated for transparent and upfront pricing via the APR. The CARD Act restricts issuers’ ability to reprice credit card loans based on risk as new information becomes available (for example, adjusting the APR to reflect payment behavior). This regulatory change led issuers to charge higher rates from the beginning, especially for subprime accounts that pose greater risk to the issuer (and are more likely to revolve).
Beyond risk-based pricing, issuers are also incorporating other pricing mechanisms into the APR. Using data from the CFPB’s 2023 CARD Act Report, the Consumer Bankers Association shows that credit card issuers have substantially reduced the use of annual fees for subprime and deep subprime accounts from 2015 to 2023. Instead, issuers are incorporating those fees into the APR, putting additional upward pressure on the APR margin.
On competition
Given these upward forces on the APR margin, CFPB’s conclusion that anti-competitive market behavior is to blame for the increase does not hold water — on the contrary, these forces indicate a movement towards greater pricing transparency in the market. As pointed out in a recent ABA Data Bank post and as demonstrated by the Department of Justice’s threshold for determining the degree of concentration in a given industry, the credit card market is highly competitive. It is a sign of this competitiveness that issuers have sought to expand the credit card market, and APR margins are thus evidence for the opposite of the CFPB’s conclusion.
