Average Credit Card Interest Rates Are Way Too High

Average Credit Card RatesThe average consumer credit card rate is 16.75% as of January 6, 2012 according to IndexCreditCards.com.  With the US Bank Prime Rate at 3.25%, credit card companies are charging 13.5% over Prime.  In other words, credit card companies are making big bucks off you!

The US Bank Prime Rate or “lending rate” has averaged 3% above the Federal Funds rate, which is currently at 0.25% thanks to BenGenie.  The Prime Rate is used to adjust the interest rates for HELOCs, credit cards, and student loans.  The Prime Rate is considered the rate at which banks lend to the most creditworthy borrowers.

With a 13.5% spread over Prime, credit card companies are essentially saying they require a 13.5% return over Prime in order to be in the business of lending credit with a card to the average consumer.  If all consumers paid their credit card debts in full and never welched on a payment, the spread over Prime rate would probably be close to zero.  The other way to lower credit card rates is if consumers reduce demand for credit card usage and the government either regulates more tightly and/or encourages more competition.

AVERAGE CREDIT CARD RATES

My one and only personal credit card has a interest rate of 10.25%, or a full 7% points over prime.  I’ve had the card for 10 years and have never missed a payment in 120+ billing cycles.  Sure my rate is still 6.5% below the average, however, compared to mortgage rates below 4% and student loan rates below 3%, 10.25% is ridiculously high.

I gave my credit card company a ring to see if they can lower the rate, even though I never plan to give them the satisfaction of making 10.25% off me, and they politely declined.  Since I only have one personal credit card, I don’t easily have a backup to switch to, leading me not wanting to spend the time to apply a new.

High interest rates should discourage you from using your credit card and at the very least, never carry a balance.  We know in practice, this is not the case as credit card companies earn billions a year from consumer’s lack of spending discipline.  I hope as a Financial Samurai reader, you know better than to ever spend more than you earn and carry a balance.

CREDIT CARD RECOMMENDATION

If you are an avid traveler and looking for a travel rewards credit card, you can sign up for the Barclaycard Arrival World MasterCard with a $89 annual fee for double the points on all purchases and 40,000 signup miles ($400 value) or the Barclaycard Arrival World MasterCard with no annual fee with double the points on travel and dining and 20,000 signup miles ($200 value). I’m going with the version with the annual fee because the first year’s fee is waived. You can read a more detailed review I wrote of the Barclaycard Arrival here.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I think interest rates on credits cards are higher than those on other types of debt because of risk. Since credit card debt is generally unsecured, the lender often gets nothing if you fail to pay your bill. They can sue you, but many don’t follow through with a lawsuit. And even if they did, there are costs associated with suing someone. Although student loans are unsecured, you can’t discharge them in bankruptcy so they’re not as risky as other installment loans. With mortgages and car loans, there are assets, i.e., a house and a car, your lender can take. So, if you want to keep them, you’d better pay your bill.

    I believe the interest rates on my credit cards are either average or slightly below average. Years ago, I’d periodically call the credit card companies and ask for a lower interest rate. Since I now pay my balance off in full every month, it doesn’t much matter to me what the interest rate is because I don’t plan on paying any interest.

    • says

      Well said Shawanda. You are spot on.

      The delinquency of others hurts those who are most responsible. However, those who are most responsible pay their bills off in full every month so it doesn’t matter!

  2. David M says

    I have numerous credit cards and have no idea what the interest rate is on any of them – why? Because I have never paid any interest on a credit card – thus the rate is not important to me.

    I use credit cards to get tax free money from the credit card companies. I got 4 new cards last year and each one gave the equivalent of $300 – $500 as a signing up bonus (that is at $.01 per point – however, I will use most points for first class travel and thus the value is much higher, about $.10 a point). These are all annual fee credit cards – however, the fees were waived for the first year. After the first year I will cancel the credit card.

  3. says

    My main card has an interest rate of 13.24%. Today was the first time I ever looked at it. I have never paid credit card interest. I think I was late once a long time ago due to the mail and I had the interest and late fees reversed. Thanks to my payment history, they did it happily. The reason interest is so high is simple, it is an unsecured loan to people of various credit history. The credit card companies are not going to charge you based on your credit score. Some banks offer lower interest and require a better credit score or history. If I need credit, I use my line of credit.

    • says

      Even though you never pay interest, doesn’t now knowing it has a 13.24% interest rate kind of annoy you?

      It annoyed me enough to find out what the average rate is and write this post. I will never, ever pay interest b/c of this.

      • says

        I find it insulting because of my good credit, however I can’t do anything about it. I pick the things I can do something about and make changes. This does not affect me, so I don’t worry about it. I used to feel like you do, but I now focus only on the things that I can change and affects me.

  4. says

    The only credit card interest rates that I can be bothered to remember are the rates I’m paying on balance transfers. Truthfully, I don’t need them, but it’s nice to smooth out cash flow and my tuition costs over the course of the year, rather than taking two massive knocks each year, on top of 4 quarterly tax punches to the face.

    I’ve considered just paying them off in full, but I feel like I wouldn’t be getting my full money’s worth, for whatever reason.

    • says

      “I’ve considered just paying them off in full, but I feel like I wouldn’t be getting my full money’s worth, for whatever reason.” Ehhhh?

      So, instead, you are letting credit card companies get THEIR money’s worth?

      Are you just transferring the balances to low or 0% rates like musical chairs?

      • says

        No.

        Here’s the choices:

        1) Pay a much higher flat-rate fee to school to get a 2-month payment plan. (All tuition due in two payments 30 days apart.)

        2) Pay a very small flat-rate fee to have 12 months of no-interest payments for school.

        Option 1 isn’t even a benefit – half now, half 30 days from now isn’t much of a payment plan. Option 2 is much better alternative, and actually less expensive than the alternative. Nothing wrong with a little leverage, right?

  5. says

    My main card has an interest rate of 9.9%. I’ve been as low as 4.5% (well, I’ve had 0% for a year!), and as high as 18.9%. I’ve never in my life actually paid an interest payment though – I use my card for rewards and pay it off each month.

      • says

        We pay our cards off every month so I began to wonder if my older kids were aware of credit card interest and how detrimental it can be. They knew there was a concept of interest but that was about it. So…the only good thing the card offer did was to start a great conversation with my two teens!

  6. says

    Whatever the companies need to charge in order to provide me with great rewards programs are just perfect ;) I can honestly say that I’ve never had to pay the balance before and it has little bearing on the cards I choose.

  7. says

    That is a massive difference! I know what our interest rates are, although we never pay interest on our credit card.

    It’s frustrating how much extra they can get away with charging. What’s sad is how many people do not even know how much interest they are being charged, not including those who never pay interest. I mean those who just charge things to their card, never pay it off and have no idea how much they are paying in interest.

    • says

      I agree. Knowledge is really important in this case. I don’t know if I explain the egregious differential in this post clearly enough for folks to understand.

      Bottom line, Credit Card companies are making big bucks off you if you don’t pay in full.

  8. says

    Ours is 9.9% also. We have our credit card through our credit union and they offer a pretty low rate, plus our credit rating is pretty high. But I haven’t thought about it in awhile because we paid off our debt last year and we don’t keep a balance on it.

    It is interesting how many people don’t know and they don’t realize how fast it adds up.

  9. says

    I have no idea what my interest rates are on any of my cards. I just know how much rewards I get and I pay my balance in full every month. The only card where I carry a balance is my Best Buy card which is 0% for 36 months. I’m making payments to have it paid off in 35 months so it’s just an interest free loan.

  10. Darwin's Money says

    I have a couple cards solely for the cash-back rewards. I’ve honestly never given a thought to what the interest rate is because I never miss a payment in full. I couldn’t care less if it’s 15% or 25% since I always have an emergency fund, pay my bills on time, etc. I’m curious, why did you even bother asking for a lower rate, you’ll never need it right?

  11. says

    They have to build into their rate the fact that they lose some battles with people that can’t pay I guess. Every $5k in debt person that goes bankrupt or settles for 1/2 the amount adds up!

    Not justifying it, just I think that is part of it.

    I don’t have credit cards anymore just my trusty Visa debit.

  12. says

    Mine is 19.95 (and I believe it was up to 20.75 when rates were higher) – pretty much the default for CCs in NZ. Low interest rate cards are usually around 10-12 percent and sometimes you can get BT introductory rates at around 2-3.

    I don’t think there are any fee- free cards available – although the rebates I get for spending cover the annual fee and more. I have considered calling and playing the “I want to close my card” game, but never actually did.

    But really, the fees don’t fuss me because I don’t pay interest … except for the other month when I pushed it too far and missed the pay date by one day…grr. Hence why I normally pay it off each week!

  13. says

    I actually am not sure what mine is at the moment because I always pay it off in full each month. I’d guess it’s in the low to mid teens. It’s crazy how high credit card rates are and how close to 0 interest rates are at the banks.

  14. says

    Like darwin, im not too sure what my interest rate is, though I believe it’s around 15% for my card. Since I paid off my card debt in may 10, I havent paid a cent in interest, and have been using the cards solely for travel rewards. Maybe the credit card companies need 10%+ over prime so that they can pay bonuses (like airline miles, hotel points and cash back) to users who never carry a balance.

  15. says

    Honestly, I’ve been paying my cards off each month in full so I don’t pay interest. Thus, I really don’t know what the current interest rate is! We should all know this though, being responsible on front is no excuse for missing a detail like that :) Thanks for bringing up the topic.

    The best approach is to live within one’s means and try like hell to avoid carrying credit card debt, so you don’t have to worry about interest.

  16. says

    I think the large spread is that the issuing bank loses their borrowing cost on the balance for the first month. They have to make that up, and still make no money if you pay in full. So their break-even rate is a function of their borrowing cost and the ratio of new purchases to existing balances. The break-even point is probably a little higher than you’d think.

  17. says

    I don’t my main card has an interest rate since I use the premier gold card from Amex. I don’t know about my other cards as I don’t have a balance

  18. says

    Mine is 30%. Before all of this hullabaloo with the financial sector crashing it was at ~12%.

    I’ve been meaning to change cards but I was in the process of purchasing an investment property and didn’t want to mess around with my credit score. In all honesty it doesn’t matter since I pay it off every month but 30% is just ridiculous and I try not to support ridiculous :)

    The funny thing is, I have never missed a payment and have a fico score of around 800. I guess I’m just that risky an investment.

  19. says

    My credit card interest rate is 15%, but I don’t care since I don’t carry a balance.

    My friend went to open a credit card account with a computer manufacturer when buying a new PC. He has good credit, never missed a payment on his credit card/student loan, and they offered him their card with a 26% rate! He laughed and said “no thanks”.

    The spread also relates to other bank products too. Savings account pay 0.10% while the bank turns around and lends out the money for 4-6%. It’s not as great as the spread on credit cards, but it all adds up!

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