Sticker Price vs. Reality: Why APR Doesn’t Tell the Whole Story of Credit Card Costs

If you look at what borrowers actually paid using the CFPB's Total Cost of Credit framework, rising credit card costs are driven almost entirely by Federal Reserve policy rates. The rest is, somewhat paradoxically, explained by consumers managing credit better than before.

WASHINGTON, D.C. - Credit card annual percentage rates (APRs) climbed from 17.6 percent to 24.9 percent over the last decade. That number gets cited constantly as evidence that something is wrong with the credit card market.

But rising APRs were actually the intended outcome of landmark legislative reforms to the credit card market in 2009. Congress deliberately pushed more credit card costs into upfront sticker prices that consumers could compare and shop around.

When Congress asked the Consumer Financial Protection Bureau (CFPB) to examine the impact of these changes on the cost of credit, the CFPB looked at the data and delivered a clarifying verdict: APRs had risen, but that was expected; what mattered was that the Total Cost of Credit (TCC), a measure that captures what consumers actually pay in interest and fees relative to their balances, had gone down.

New research by Dr. Alexei Alexandrov applies that same lens to the period between 2015 and 2024. His findings cut against the popular (and Populist) narrative in three ways.

1. Most of the increase in borrowing costs over that period traces directly to Federal Reserve rate hikes, not to credit card issuers quietly padding their profit margins.
2. A counterintuitive wrinkle in how TCC is calculated means that consumers paying down balances more aggressively (a sign of financial health) can make the metric appear to rise even when nothing bad is happening.
3. The growing prevalence of rewards-focused annual fees among Superprime consumers has changed what annual fees actually represent, in ways that may cause TCC to overstate borrowing costs compared to when the metric was first developed.

When adjusting only for changes in the Prime rate, Total Cost of Credit increased much more modestly over the last decade.

And when additionally accounting for the changing role of annual fees - from a borrowing-related charge to a rewards-related feature for many consumers - adjusted Total Cost of Credit (the dark blue line) remains comparatively stable over time.

Figure 8. Once Annual Fees are Accounted For, the Spread between Total Cost of Credit and the Prime Rate is Essentially Flat

Key Findings

• When Congress asked what happened to the cost of credit after the CARD Act, the CFPB's answer in 2013 was unambiguous: APRs rose, but Total Cost of Credit - what consumers actually paid - fell.
• TCC grew more slowly over the last decade than average APRs.
• Because most variable-rate credit cards are indexed to the Prime rate, Federal Reserve policy rate increases explain much of the growth in credit card borrowing costs between 2015 and 2024.
• Higher payment rates mechanically increase TCC as consumers pay down balances more aggressively - meaning the metric can rise even as consumers are in better financial shape.
• The growing prevalence of rewards-focused annual fees among Superprime consumers may cause TCC to overstate borrowing costs, since those fees were originally designed to measure access-to-credit costs for Subprime borrowers - not travel perks for people who pay in full every month.

Dive Deeper

To read the full blog post, click HERE.