Q1 2025 Insights Report

Interest Rates on Credit Cards Rise

Interest rates on credit cards are nearly the highest they have been since the onset of the Large Bank Credit Card and Mortgage Data collection in 2012. The average purchase APR (annual percentage rate) for general purpose cards currently sits at 24.62 percent compared with an average of 20.14 percent during the pandemic period.¹ The average purchase APR for private label cards, historically higher in part because of looser underwriting practices, is even greater, hitting a new series high of 31.15 percent compared with an average of 25.82 percent during the pandemic period. With adjustment for the prime rate, as shown in Figure 1, it is evident that since the second quarter of 2014, the interest rate margin for general purpose credit cards has reliably grown year over year and is at an all-time high (17.12 percent). The more volatile interest rate margin for private label credit cards just experienced its second largest year-over-year increase of 257 basis points, also hitting a series high (23.65 percent). Thus, even with controlling for the prime rate, the cost to borrowers of not paying their credit card balances in full each month is considerably higher in the current environment compared with just one year ago.

Credit Card Performance Improves as Banks Sustain Strict Underwriting

Despite the high cost of credit, credit card performance improved in the first quarter of 2025 as the number of new large bank credit card accounts fell and credit card balance growth decelerated year over year. The share of active credit card accounts making just the minimum payment fell 59 basis points, after a year of consecutive quarter-over-quarter increases resulted in a 12-year series high in the fourth quarter of last year. In a typical seasonal trend, delinquency rates tempered in the first quarter, with both account-based and balance-based 30 plus days past due rates decreasing. Moreover, all measures of delinquency (account- and balance-weighted) fell on a year-over-year basis. This is the first broad-based yearly decline since the fourth quarter of 2021. Stricter underwriting practices adopted in previous years are contributing to fewer new accounts and are aiding improved delinquency rates. The subprime share of large bank credit card originations has been falling for the past three years, with the share of accounts originated to low credit score borrowers (score <660) currently at 16.4 percent, compared with 23.3 percent in the first quarter of 2022. Despite improved credit performance and conservative lending by large banks, delinquency rates remain historically high relative to the start of the large bank collection. This has resulted in credit card losses, reflected in Figure 2 as the net charge-off rate, reaching a series peak in the first quarter of 2025.

Higher Share of Mortgage Borrowers Opting for Adjustable-Rate Loans

With historically high home prices and average mortgage origination interest rates approaching a series high, buyers are searching for cost relief in the form of adjustable-rate mortgages. Unlike fixed-rate mortgages, ARMs often offer a “teaser” fixed-rate term at origination before converting to a variable rate. Initial rates are typically lower than those offered on traditional fixed-rate loans. When the initial fixed rate expires, ARM monthly payments become subject to current market interest rates. Loans originated at lower (or higher) rates than prevailing market rates could be prone to larger payment shocks (or reductions). As shown in Figure 3, conventional ARMs constituted a 25.1 percent share of large bank first mortgage originations in the first quarter of 2025, compared with only 7.8 percent in the first quarter of 2021 when average first mortgage origination interest rates reached a series low. Large bank total conventional ARM balances climbed for a 12th consecutive quarter, reaching a series high of $344.3 billion. This is a 34.5 percent increase for large bank conventional ARM balances since the first quarter of 2022, exceeding the total mortgage market conventional ARM growth rate, according to data from the National Mortgage Database. Future reset risk is mitigated by large banks’ continued focus on lending to borrowers with high credit scores and low leverage, and, according to Intercontinental Exchange (ICE), a marketwide shift to longer initial ARM reset periods. While growth in ARM balances has begun to change portfolio composition at large banks, portfolio quality remains strong, buoying overall credit performance. The 30, 60, and 90 plus delinquency rates continue to hover near series lows.