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Why Are Credit Card Interest Rates So High? Advertiser disclosure You’re our first priority. Every time. We believe that everyone should be able to make financial decisions with confidence. While our website does not include every company or financial product on the market, we’re proud that the advice we provide as well as the advice we provide and the tools we create are independent, objective easy to use and completely free. How do we earn money? Our partners pay us. This can influence the products we write about (and where those products appear on the site) however it in no way affects our advice or suggestions that are based on thousands of hours of research. Our partners are not able to promise us favorable reviews of their products or services. . Why are Credit Card Interest Rates So High? The card issuers are in the business of making money however it is a matter of the risk that they are taking. By Gregory Karp Senior Writer | Personal finance, credit cards credit scores Gregory Karp is a former writer for NerdWallet and an expert on personal financial planning and credit cards. Journalist for more than 30 years, he’s been a newspaper reporter as well as an editor, authored two personal finance books and developed”Spending Smart,” a “Spending Smart” syndicated newspaper column. His distinctions include national recognition a number of times from the Society for Advancing Business Editing and Writing. Nov 9 2022, edited by Kenley Young Assigning Editor Credit score, credit cards Kenley Young oversees the daily coverage of credit cards for NerdWallet. Before that, he was an editor of the homepage and digital content producer at Fox Sports, and before that a front page editor at Yahoo. He has a wealth of experience in digital and print media, including periods as chief of the copy desk as well as a wire editor, and a metro editor at The McClatchy Newspaper chain. Email:
. The majority of products featured here are from our partners who pay us. This influences which products we review and the location and manner in which the product is featured on a page. However, this does not affect our opinions. Our opinions are our own. Here’s a list and . Interest rates for credit cards might appear outrageous, and some go over a 20 percent annual percentage rate. This is significantly greater than mortgages or auto loans. The cause for these high rates goes beyond corporate greed or profits that is a matter of risk to the lender. If you don’t pay your mortgage or auto loan the bank could take your car or house. If you fail to pay the credit card bill, the card issuer’s options are restricted. The issuer could damage your credit rating and endure the hassle and expense of suing you. However, there’s no guarantee that it will receive its money back. In the world of finance, the more risk you take, the better potential payoff you can expect. For banks and other card issuers credit cards are decidedly risky because a large number of customers make payments late or never pay at all. Therefore, issuers have to charge high rates of interest to cover that risk. A balance can be an example of a loan for consumers. High credit card interest rates are irrelevant if they don’t keep a balance or make cash advances. But if they are able to revolve their monthly balances be sure to understand that this is an actual loan. And like anyone lending money the lender is expected to receive interest. Why rates are so high Unsecured loan credit cards are generally unsecure, which means there’s no collateral , no property that the lender can use if the borrower doesn’t pay. That’s as opposed to the aforementioned , which requires an upfront deposit to secure collateral, or a loan to purchase a house or car that a lender could be able to repossess and then sell to earn some of the money. This is the reason why the bank won’t issue you an official title for your car for instance until you’ve paid the auto loan. Credit card balances that are not secured do not have the backing of anyone else’s promise to pay or pay, for example, the federal government backing some student loans. The Nerdy Tip Credit card defaults, also called charge-offs, are when a bank gives up trying to collect on the debt. Charge-offs ranged from 3% to 4% range from 2012 to 2019, but spiked past 10% between 2009 and 2010, following the recession, as per data provided by the Federal Reserve Bank. Uncertainty: In contrast to other kinds of loans, credit card issuers don’t ask you why you require the cash. It could be used to pay for medical bills or repair to your car, or gamble on blackjack in a casino or to purchase bobblehead dolls. The banks aren’t able to tell you the amount you’ll need to borrow. It could be zero or your maximum credit line. This uncertainty poses a risk to the lender. Profit: Many card issuers exist to make a profit for shareholders — or in the case of credit unions, channel profits into benefits for members. Credit card interest income will boost the bottom line and helps pay for the lucrative benefits of and 0% time periods of . Are rates really that high? It depends on the comparison. Rates are much higher than auto loans and mortgages, which are used to seeing in the single digits for those who have good credit. But credit card rates are not as high as rates that can be more than 100% APR. In the first half 2019 the median interest rate on credit cards was 17% for accounts that are assessed interest in accordance with the Federal Reserve. And NerdWallet’s discovered that rates have increased by 35% over the past five years. The reason rates differ is because of credit rating: In the simplest sense, consumer credit ratings are designed to indicate the probability that you’ll be able to repay any loan, including a account balance on your credit card. People with better lending profiles for instance, those with higher credit scores, are charged lower rates because their likelihood of default is much lower. This is why the interest rates on credit cards are expressed as a range, in order to reflect rates charged to consumers with good, average, and poor credit. If banks trust you more they believe their risk is less and charge you at a lower cost. You can find your credit card through NerdWallet. Market conditions Credit market for cards is competitive which is why finance charge rates tend to be comparable across major issuers. Also, they generally move in line with the current interest rates, often tied to a benchmark called”the prime rate. The rates charged by cards are typically the prime rate and a specific percentage points. In the case of a prime rate that is 5% and your card has the prime rate plus 10 percent points, your APR is 15 percent. >> MORE Information on how to avoid paying high interest rates. Pay off the balance: If you don’t carry an account with a monthly balance then you don’t need to be concerned about the rate your card issuer charges. >> MORE: Reduce your rates: You could utilize a variety of methods to lower your rate get a lower rate, using the balance transfer credit card or, in the long term, . Credit unions are an excellent option to search for cards that have relatively low interest rates. Author bio Greg Karp is a former NerdWallet writer, and an expert on personal financial matters as well as credit card transactions. He previously worked at The Chicago Tribune and wrote two money books. On a similar note… Find the perfect credit card for you. Whether you want to pay less interest or earn rewards, the perfect card is out there. Just answer a few questions and we’ll narrow the results for the best card for. Dive even deeper in Credit Cards Get more smart money moves – straight to your inbox. Sign up and we’ll email you Nerdy articles about the topics in finance that are important to you along with other ways to help you get more from your money. Make the best financial decisions
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