Looking for a lower credit card interest rate? Good luck.
Credit card debt is mounting and purchasing a card with a lower interest rate can save you money. But the challenge is finding one.
Smaller banks and credit unions typically charge significant fees lower interest rates on credit cards than the largest banks do — even among customers with prime credit, the Consumer Financial Protection Bureau reported last week.
But online card comparison tools tend to emphasize cards from larger banks that pay fees to the sites when customers apply for cards, said Julie Margetta Morgan, the agency’s deputy director for research, monitoring and regulation. “It’s pretty hard to shop for a good deal with a credit card right now.”
For cardholders with “good” credit — a credit score of 620 to 719 — the typical interest rate charged by big banks was about 28 percent, compared to about 18 percent at small banks, the report found.
For those with poor credit – reflected by a score of 619 or lower – big banks charged an average rate of more than 28 percent, compared to about 21 percent at small banks. (Basic credit scores range from 300 to 850.)
The variation in the rates charged by large and smaller banks can mean a difference of an average of $400 to $500 per year in interest for cardholders with an average balance of $5,000, the agency found.
“I was surprised by the difference” between the rates, said John Pelletier, director of the Center for Financial Literacy at Champlain College in Burlington, Vt.
The difference is more than just academic, as Americans owe more than just that $1 trillion The number of credit card debts and delinquencies is increasing.
The consumer agency said in its report that a “lack of competition is likely contributing” to higher card interest rates at the largest card companies. (The 10 largest issuers accounted for 83 percent of credit card loans in 2022, up from 87 percent in 2016, the agency reported. in OctoberThis week, a deal was announced to merge two major card issuers, Capital One and Discover. This deal is likely to draw regulators’ attention amid concerns that it would give larger financial institutions even more power to set higher rates.
In response to the agency’s report, the Consumer Bankers Association, a trade group that mainly represents large banks, defended the credit card market as “highly competitive” and criticized the agency for making “troubling, unsubstantiated” statements.
“A thriving marketplace means consumers can choose products that can have a range of prices and offer features, benefits or other value specific to them,” the association said. in a statement.
The agency based its report on 643 credit cards offered by 84 banks and 72 credit unions in the first half of 2023. Most cards were available nationally, while the rest were offered regionally or in one state. The report includes annual percentage rates, or APRs, on general-purpose cards offered by the 25 largest card issuers (based on outstanding credit card balances), plus a sample of small and mid-sized banks across the country.
The agency collects credit card information a questionnaire twice a year; last spring, the survey asked for more details, such as how credit scores affect interest rates.
Federally chartered credit unions have a legal limit of 18 percent on the interest rates they can charge, the agency noted. But smaller banks also generally had lower rates.
Fifteen card issuers, including nine of the largest, reported offering at least one card with a maximum rate of more than 30 percent. Those banks included household names such as Ally, Capital One and Citibank. (Many such cards were “co-branded,” the agency said, meaning they also bore the names of partners such as stores or airlines.)
The interest on a card is less important for people who pay their balance in full every month because they don’t pay interest. Those consumers may be more interested in using credit cards for “cashback” rewards or for points that translate into savings on purchases such as frequent flyer miles or hotel stays.
But if you’re a “revolver” who regularly carries a balance, a double-digit interest rate will likely take away any benefit from cash or points. “You shouldn’t choose a card based on points” if you normally carry a balance, says Adam Rust, director of financial services at the Consumer Federation of America.
However, many people underestimate the impact of interest rates on their credit card debt. “The instant gratification of purchases, coupled with the delayed pain of payment, can overshadow the long-term financial cost that APR represents,” says Sachin Banker, assistant professor of marketing at the University of Utah business school, in an email.
People might pay more attention to card rates if they understood the composition of interest rates over time, Mr. Pelletier said. He calculates that someone with good credit and a card balance of $5,000 would save $42 per month by using a card with the typical small bank rate instead of the big bank rate.
Even if you pay off your card balance regularly, it’s a good idea to have a card with a lower rate because unexpected costs (for example, a medical bill) may require you to temporarily carry a balance.
The consumer agency has said it is considering creating a public search tool that would include a variety of cards from large and small banks. “We are actively looking at that at the moment,” Ms Morgan said.
The agency is already making available an online spreadsheet with the conditions shown on the maps included in the survey.
The Independent Community Bankers of America, a trade group, offers a local bank search tool www.banklocally.org. You can then consult the websites for ticket rates or call for information.
The National Credit Union Administration provides a search tool for credit unions. Many limit membership to certain groups, but some are more flexible.
Here are some questions and answers about credit cards:
Do annual credit card fees depend on the size of the issuing bank?
Cards issued by major banks were three times more likely to be charged an annual fee than cards issued by smaller banks, the consumer agency report found. Additionally, the average fee at large banks was higher: $157, compared to $94 at smaller banks.
Why are credit card rates so high?
Credit cards offer “unsecured” loans, meaning the debt is not backed by collateral, like a mortgage or car loan. If you don’t pay your bill, the bank can’t seize property to cover its losses, so it charges higher rates to compensate for the risk. More recently, card rates generally rose as the Federal Reserve raised its benchmark interest rate to cool inflation.
But at one separate analysis Posting on its website on Thursday, the consumer agency said card issuers had raised interest rates significantly above prime rates, costing consumers more in interest.
How can I be sure I’m getting the best credit card rate?
An important factor in qualifying for a good rate is your credit score, which is based on information in your credit report. Please check your report for accuracy before applying for a new card. (A recent Consumer Reports analysis shows this complaints to the federal government about inaccurate credit reports has more than doubled since 2021.) You can check your report for free as often as weekly with the three major credit bureaus, at www.jaarlijkscreditreport.com.