Why are interest rates so high on credit cards?
Risk: Credit card debt is unsecured debt, meaning that the lender has no collateral to repossess if the borrower defaults. This makes credit card lending riskier for lenders, and they charge higher interest rates to compensate for this risk.
The bottom line
Card rates are high because they carry more risk to issuers than secured loans. With average credit card interest rates above 20.7 percent, the best thing consumers can do is strategically manage their debt.
Credit cards are unsecured loans
Unlike a mortgage or a car loan where the bank has collateral to take if the borrower doesn't make their loan payments, there is nothing the bank or card issuer can collect from you if you're late on a bill — besides interest.
When inflation is running high, the Fed raises those short-term rates to slow the economy and reduce pressure on prices. But higher interest rates make it more expensive for banks to borrow, so they raise their rates on consumer loans, including mortgages, to compensate.
Plus, credit cards already have notoriously high interest rates, so any additional increase can just make your unpaid balance balloon even more over time and make it more difficult to pay off. As interest rates rise, your best bet is to pay down high-interest credit card debt.
Credit card interest rates can make it harder to pay off your debt, but you may be able to negotiate a better rate or a limited-time offer by simply calling your credit card issuer. While it can some time and effort and your request may be denied, it doesn't hurt to ask.
Cards have 'never been this expensive,' CFPB says. Credit card interest rates are at all-time highs. Consumers who carry a balance paid an average annual percentage rate of 22.8% at the end of 2023, according to federal data.
The APR you receive is based on your credit score – the higher your score, the lower your APR. A good APR is around 22%, which is the current average for credit cards. People with bad credit may only have options for higher APR credit cards around 30%. Some people with good credit may find cards with APR as low as 16%.
If your credit card account has a variable rate, the credit card rate is tied to an index. This index rate can change periodically. The bank can change your interest rate periodically when the index changes. Your account agreement explains when the bank can make changes to your variable rate.
The interest on most credit cards is variable and will change from time to time. Some cards have multiple interest rates, such as one for purchases and another for cash advances. Your credit score can affect the interest rate you'll pay as well as which cards you may qualify to use.
Why are interest rates not going down?
Thanks to consistently high inflation, the Federal Reserve has been forced to keep interest rates paused at a 23-year high for some time. That's meant good things for savers, but for hopeful homebuyers, it's drastically increased the cost of taking out a mortgage due to higher mortgage rates.
Current swap rates suggest that interest rates will be lower over the coming years, but not dramatically so. Five-year swaps are currently at 3.91 per cent and two-year swaps at 4.48 per cent - both trending well below the current base rate.
When interest rates are higher, banks make more money by taking advantage of the greater spread between the interest they pay to their customers and the profits they earn by investing. A bank can earn a full percentage point more than it pays in interest simply by lending out the money at short-term interest rates.
Yes, a 24% APR is high for a credit card. While many credit cards offer a range of interest rates, you'll qualify for lower rates with a higher credit score. Improving your credit score is a simple path to getting lower rates on your credit card.
Most economists, including Zandi, expect interest rates to fall fairly significantly in 2024 and 2025. Zandi is forecasting that the Federal Reserve will cut short-term interest rates four times in 2024 — a quarter-point each time. He expects another four rate cuts in 2025 and two more in 2026.
Because higher interest rates mean higher borrowing costs, people will eventually start spending less. The demand for goods and services will then drop, which will cause inflation to fall. Similarly, to combat the rising inflation in 2022, the Fed has been increasing rates throughout the year.
Credit experts advise against closing credit cards, even when you're not using them, for good reason. “Canceling a credit card has the potential to reduce your score, not increase it,” says Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.
You can ask your credit card company to freeze the interest on your credit card, but there is no legal obligation for it to agree. The good news, though, is there are several voluntary codes of conduct most credit card companies have signed up to, which encourage them to help you if you are in financial difficulty.
For a score with a range between 300 and 850, a credit score of 700 or above is generally considered good. A score of 800 or above on the same range is considered to be excellent. Most consumers have credit scores that fall between 600 and 750. In 2022, the average FICO® Score☉ in the U.S. reached 714.
The current highest credit card interest rate is 36% on the First PREMIER® Bank Mastercard Credit Card. The next highest credit card interest rate seems to be 35.99%, charged by the Total Visa® Card and the Milestone® Mastercard®.
Who controls the interest rates on credit cards?
In summary: The Fed sets a target federal funds rate range, which banks use to determine their prime rate. Issuers then add percentage points on top of the prime rate to determine your credit card's rate range.
Average American Credit Card Debt
The Federal Reserve study does not provide numbers for the average credit card balance per consumer. However, according to Transunion, this figure rose from $5,795 in January 2023 to $6,295 in January 2024.
A good credit card APR is a rate that's at or below the national average, which currently sits above 20 percent. While there are credit cards with APRs below 10 percent, they are most often found at credit unions or small local banks. If you don't have good credit, you're likely to receive a higher credit card APR.
Penalty APRs are part of why credit card overspending can be so dangerous, as they may reach higher than 29.99% when a payment is at least 60 days late. Interest rates this high would be unthinkable in most other common lending contexts.
Even though you paid off your account, there could have been residual interest from previous balances. Residual interest will accrue to an account after the statement date if you have a balance transfer, cash advance balance, or have been carrying a balance from month to month.
