APR: Swipers keep swiping

When zero wins

Credit cards are the most prevalent type of debt in the US and the most common way for the average person to encounter an APR, or annual percentage rate.

Simply put, an APR is the rate you pay each year to borrow money. Zero percent is the best, and many companies offer that as a short-term perk to entice borrowers to switch lenders. But it’s an outlier: At 22.9%, the average APR on new credit cards in America is at its highest level since the online lending website LendingTree began tracking monthly rates in 2019.

Although many people beefed up their savings during the pandemic, rising inflation and recession fears have led more Americans to rely on plastic. At the end of this year’s third quarter, total national credit card debt was $930 billion, and balances were up 15% from a year ago, an annual jump that hasn’t occurred in two decades.

That uptick is causing some concern on Wall Street about the health of the economy. High inflation is weighing on consumers’ wallets. But given that this holiday season is one of the first since the pandemic began that people can celebrate with large social gatherings, instead of cutting back, people are turning to credit.

Let’s get to swiping.

By the digits

0%: An APR that many credit cards offer to entice new customers to switch lenders. Customers can transfer their credit card balance to a new provider that offers a grace period, such as one year or 15 months interest-free, allowing customers to more quickly pay down the debt principal.

191 million: Number of Americans with at least one credit card. Half of all American adults have at least two cards, and 13% have five or more cards.

$31,015: Amount the average American has access to in credit.

$930 billion: American credit card debt as of the third quarter of this year, according to the Federal Reserve Bank of New York.

15%: Increase in American credit card balances compared to a year ago, the largest jump in more than 20 years.

Quotable

“If you use your credit cards, you do not want to be rich.”

—Billionaire entrepreneur Mark Cuban in an interview on The Ramsey Show, sharing his belief that paying with plastic (and thus incurring interest) isn’t a good wealth strategy compared to making investments and building assets. Being a billionaire probably helps, too.

Explain it to me like I’m 5!

When it comes to financing a car or a home, APR can differ significantly from other kinds of interest rates. In those cases, APR includes additional expenses, such as an origination fee—an upfront amount lenders charge to begin processing a loan application—and a documentation preparation fee for stamp duty and other legal contracts. But when it comes to credit cards, interest rate and APR are interchangeable.

Because each loan has a different time period and calculates interest at different intervals, APR is an important measure to ensure people are getting an “apples to apples” comparison for financial products. Otherwise, a company may advertise a low monthly interest rate while implying to customers that it is an annual rate. APR is, in fact, an annual rate—and all lenders have to disclose APR on their loans and credit cards thanks to the Truth in Lending Act of 1968.

Although a home loan will have a single APR, credit cards usually offer an APR range that varies depending on the category of spending. Other types of transactions, like cash advances, will generally carry higher rates.

What else is an APR?

The acronym has meanings far beyond the confines of financial lingo.

💊 Advanced pain relief

🧂 Ammonium perrhenate (a white salt)

🌧 April

📻 American Public Radio

⚽️ Average penalty rate (a soccer term that calculates how many times an athlete scores a goal in penalty kicks. For instance, Lionel Messi on average scores 77.7% of the time, including two at the World Cup final that helped Argentina bring home the trophy).

The cradle of credit

The idea of credit dates back to Sumer in 3500 BC, when farmers would take out loans to grow crops. By 1800 BC, the code of Hammurabi set maximum interest rates for the Babylonian empire at 33.3% a year for grain and 20% for silver.

Many of early Western philosophy’s greatest minds like Plato, Aristotle, Seneca, and Plutarch spoke out against usury, or lending money to people at ridiculously high interest rates. Aristotle in particular didn’t hold back on his stance: “The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural object of it.”

However, the rise of commerce and Protestantism brought a change of heart. After the Reformation in 1545, England became the first country to establish a legal rate of interest (10%), and in 1787, philosopher Jeremy Bentham penned “A Defense of Usury” (pdf), a pamphlet arguing that capping interest rates harms the ability for businesses to form and flourish.

In the early 19th century, efforts to track creditworthiness began to emerge, beginning with a group of English tailors who shared information about which customers were good for the money. In 1899, the Retail Credit Company was founded in Atlanta, Georgia, and began compiling extensive lists of customers’ credit history. The company eventually became Equifax, the oldest of the three major credit agencies in the US.

Don’t judge a card just by its APR

APR isn’t the only fee consumers should watch out for with credit cards. Annual fees are another common cost. Even cards with no annual fees can end up costing the consumer, since many vendors place surcharges on credit card transactions or inflate product prices to make up for interchange fees they get charged by credit card companies.

It can still work out in favor for some people, since rewards can offset that amount and then some. But people who have no access to credit end up on the short end of the equation, subsidizing richer people’s “free” miles, dining, and cashback through higher retail prices.

A coalition of merchants is campaigning currently for the US Congress to pass a credit card competition act, complaining that Visa and Mastercard, which account for nearly 80 percent of the credit card market, run a duopoly. The legislation would require credit cards issued by the nation’s largest banks to have an option to get processed by at least two unaffiliated networks—Visa or Mastercard, plus a network such as NYCE, Star, Shazam, American Express, or Discover. That way, merchants can decide which to use when a transaction is made, forcing networks to compete over fees, security, and service.

Pop quiz

What does using credit cards over cash cost the average American household each year?

A. $500

B. $1,200

C. $700

D. $350

Find the correct answer at the bottom!

Brief history

1950: Diners Club issues the first modern credit card. The idea comes from Frank McNamara, a businessman who’d forgotten his wallet while out to dinner in New York.

1958: BankAmericard (which became Visa in 1976) offers the first card with revolving credit.

1966: A network of banks that accept cards as payment forms the Interbank Card Association, eventually turning into a global alliance called Mastercard International in the 70s.

1969: The magnetic strip is added to credit cards thanks to the invention of an IBM engineer. Before that, cards were imprinted by a machine and sent to a processing center where card information was manually put into a computer.

1999: American Express debuts the Centurion Card, also known as the “black card,” a high-status line of credit with no limit aimed at top-tier spenders.

2012: Affirm, currently the leading buy now pay later provider, is founded in San Francisco. Similar companies like Klarna and Afterpay soon follow.

Take this 💳 for a swipe

Over the last decade, buy now pay later (BNPL) companies that allow shoppers to pay in installments with no interest or APR have blossomed. Positioned as a credit card substitute, these companies, like Affirm or Klarna, make most of their money by charging retailers a fee for using their services, usually somewhere between 2% and 8% of the purchase. Retailers are happy to partner with them because doing so usually increases how much a shopper spends. Five leading firms surveyed by the Consumer Financial Protection Bureau recorded 180 million in BNPL loans totaling over $24 billion in 2021, a near tenfold increase from 2019.

BNPL companies say the credit industry has traditionally excluded poorer segments of the population and they are democratizing access to credit. But if a shopper misses a payment, they can incur late fees that would be heavier than using a credit card. There’s no regulation of these penalties, and each firm decides on their own. According to a survey by CreditKarma, 22% of BNPL users actually end up using their high-APR credit cards to pay down their BNPL debt. So much for escaping the rate.

The Consumer Financial Protection Bureau has flagged this fast-growing sector of the industry for concern given growing delinquent accounts. Unlike traditional credit, which is reported to bureaus and can give an overall picture of a consumer’s entire debt, BNPL companies are not able to see how much someone has borrowed elsewhere, which can lead to situations in which people are severely overleveraged.

Poll

What’s your favorite other meaning of APR?

• All positive rap
• Asia-Pacific region
• Another pun required
  

Tell us your thoughts!

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Today’s email was written by Tiffany Ap, and edited and produced by Morgan Haefner.

The correct answer to the pop quiz is C., $700, according to the National Retail Federation.