Credit cards accelerate transactions by allowing credit card holders to have an immediate access to liquidity. Anecdotal evidence suggests that the U.S. credit card debt balance has gone up by roughly 20% from a decade ago, reaching over $1 trillion as of late 2019, due to credit card companies raising the limit for credit cards by 20%, thereby allowing more borrowing by consumers. This immediate access to liquidity is, however, not interest-free.

All credit card companies stipulate interests—implicit, explicit, and avoidable—on their credit cards. Credit card interest rates usually range from as low as 10% to as high as 30%. In most cases, the high interest rates are not correlated with other market-wide debt rates such as auto loans or mortgage interest rates. Unlike credit card interest rates, auto loans and mortgage interest rates have been declining over years since the financial crisis in late 2007 and likely to decline again due to the uncertainty associated with the COVID-19 pandemic. Almost 22 million Americans have applied for unemployment benefits during the first month of COVID-19 pandemic and unemployment rates has been surging since then nationally and globally. This rare event may have negative implications on credit card rates but positive on other forms of debts. The cost stickiness of credit card interest rates in hence a puzzling phenomenon in the finance world.

With the growing versatility of services provided by credit card companies, discussing determinants of interest rates of credit card has become of growing interest to many consumers in the United States and worldwide. This article raises some important questions related to credit card rates and attempts to provide some answers. Why are even the best credit card rates still so high? What is the best way to use a 0% intro rate? Should you always try to get the credit card with the best interest rates? Why aren’t there more credit cards with low fixed rates? The answers to these questions are posted below.

Why are even the best credit card rates still so high?

The best credit card rates are so high for many reasons: First, the traditional service of lending by credit card issuers has evolved to include providing a plethora of services and benefits other than simply providing liquidity. Credit card issuers are no longer providing only immediate access to funds. Rather, they provide bonus rewards, cash back, 0% interest free for transferring credit within a limited time, and others. All these extra services are factored in the “Oh! not so low” credit card interest rates. Second, as mentioned above, the credit card companies are dealing with over $1 trillion of total consumer debt in the USA as of February 2020. On average, the balance on each credit card is almost $6,500. It sounds reasonable to pay, say, a minimum of 10% interest rate on such balance. Third, credit card interest rates are affected by consumer’s credit scores. While 650 credit score looks fair or good, from credit card issuers, this rate is poor and may entitle credit card holder to a high interest rate. Fourth, credit cards are a form of unsecured loan and the absence of collateral make them an expensive source of borrowing.

What’s the best way to use a 0% intro rate?

The best way to use a 0% intro rate is to use it for the purpose you acquired the credit card for, which is to simply pay off your debt during this introductory period of 0% interest rate. During this grace period of no interest rates, consumers are advised to relocate their high interest credit card debt to this 0% credit card and most importantly to pay off the entire balance, if possible, during this grace period. If the balance is not paid in full during this period, you may end up paying excessive interest rate. For example, a $10,000 credit card debt for 0% intro rate and 16-25% flexible interest rate may pay monthly 160-250 interest.

Should you always try to get the credit card with the best interest rates?

Not necessarily. A low interest rate on a credit card is just one advantage of credit card benefits. If you’re a short-term oriented consumer, meaning you only need the credit card for a short period of time—perhaps to pay off your existing debt by transferring it to a low interest rate or even a 0% intro rate—you may not care much about the best interest rates as much as you would care about the transfer fees and duration of the low or 0% intro rate. In the short-term, your primary objective would be to transfer high-to low-rate credit card and repay debt as soon as you can during the 0% intro period. However, if you are a long -term oriented, you possibly use credit card more often and would be more interested in getting the credit card with the best interest rates, assuming your objective is to use your card more often and pay it off accordingly whenever you can from your checking account.

Why aren’t there more credit cards with low fixed rates?

The main reason as to why there are not more credit cards with low fixed rates is that credit card debt is an unsecured form of finance, meaning that there is almost no collateral to guarantee that card holder will pay the balance by the due date. Additionally, credit card debt is growing, and most recent figures show that it is close to $1 trillion as of February 2020. The average credit card balance per consumer is $6,500 and this translates into uncertainties and increased risk that is borne mainly by credit card issuers. The rise is credit card debt is associated with the rise in the cost of living that made consumers resort to the use of credit cards. Additionally, the increase in student loans by more than double since 2010 to reach a record high of $1.6 trillion reduced liquidity and increased the demand on credit cards and hence interest rates. Credit card issuers need to model their finances in a way that would offset the risk they bear when consumers default and meet consumers’ expectations of diverse services other than low interest rates as discussed above.

Disclaimer: The opinions expressed in this article are those of the author. They do not purport to reflect the opinions or views of the author’s affiliation or its members.