Why are credit card interest rates so high?

Question

A 24% APR on a credit card is another way of saying that the interest you’re charged over 12 months is equal to roughly 24% of your balance. For example, if the APR is 24% and you carry a $1,000 balance for a year, you would owe around $236.71 in interest by the end of that year.... read full answer

Fortunately, you won’t be charged the 24% APR if you pay off the full balance by the due date every month. If you carry a balance from month to month, however, you’ll end up paying a good bit in interest. That’s because each day the balance goes unpaid, interest charges are compounded. In other words, interest is added to both your principal balance and any previous days’ accumulated interest.

Given that some months have more days than others, the credit card issuer will break down the APR using a daily periodic rate (DPR) to determine how much interest you’ll pay for a given billing period. To get the DPR for a credit card with a 24% APR, simply divide 24% by 365. The result is a rate of 0.0658% per day. Daily interest charges apply until the outstanding balance is paid in full.

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Answer 1 · 2021-03-15 12:20:15

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Cameron DiGiovanni, Writer

@cdigiovanni20 • 03/15/21 This answer was first published on 03/15/21. For the most current information about a financial product, you should always check and confirm accuracy with the offering financial institution. Editorial and user-generated content is not provided, reviewed or endorsed by any company.

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Credit card interest rates are so high, averaging 20.16% for all new offers, because credit cards are unsecured and have no set timeframe for full repayment. Credit cards are riskier than other borrowing methods as a result, and issuers need to charge higher interest rates to compensate.

With mortgages and car loans, on the other hand, the house or car can be repossessed and resold by the lender when the balance is not paid off. But if a cardholder defaults on a credit card payment, there’s no guarantee that the lender will ever get their money back.

Legal caps on interest rates – or the lack thereof – also affect credit card APRs. In 1978, the Supreme Court ruled that card issuers could set their credit card interest rates based on the usury laws in the state they’re headquartered in. Usury laws put a legal cap on the interest rates that can be charged on a line of credit, but not all states have them. This means that banks can avoid usury laws by strategically choosing the location of their headquarters. They can then export high interest rates to states that normally wouldn’t allow them.

Finally, credit card interest rates are so high in part because people agree to pay them. Card issuers will continue offering these terms as long as consumers continue accepting them.

Why are credit card interest rates so high?

Cameron DiGiovanni, Writer

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