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Why are Credit Card Interest Rates so high?
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Why are the Credit Card Interest Rates So High?
Card issuers are in business to make profits however, it is a matter of the risk of financial loss they are taking.
The article was written by Gregory Karp Senior Writer | Credit cards, personal finance the credit score Gregory Karp is a former NerdWallet writer , and an expert in personal financial and credit card. As a journalist for over 30 years, he's been a newspaper reporter as well as an editor. He has written two books on personal finance and created the "Spending Smart" syndicated newspaper column. His honors include national recognition several times by The Society for Advancing Business Editing and Writing.
Updated Nov 9th, 2022 at 1:12PM PST
Editor: Kenley Young Assigning Editor Credit scores, credit cards Kenley Young oversees the daily coverage of credit cards for NerdWallet. Before that, he was a homepage editor and digital content producer at Fox Sports, and before that a front page editor for Yahoo. He has years of experience in digital and print media, including periods as an editor at the copy desk as well as a wire editor as well as a metro editor for McClatchy. McClatchy Newspaper chain.
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Credit card interest rates might appear outrageous, and some go over a percentage rate, which is much higher than auto loans.
The reason for the seemingly excessive rates isn't just about greed or profit for the corporation The reason is that it's about risk for the lender. If you don't pay on your car or mortgage loan, the bank can take your house or car. If you do not pay your credit card bill, the card issuer's options are very limited. A card issuer could ruin your credit score and suffer the cost and inconvenience of suing you. However, there's no guarantee they'll be able to recover its funds.
In finance, generally the more risk you take the higher the chance of paying off you're hoping for. For banks and other card issuers, credit cards are decidedly risky because lots of people pay late or don't pay at all. Therefore, issuers have to charge high interest rates to compensate for that risk.
A balance that is not paid off is an example of a loan
For consumers, high credit card interest rates are irrelevant if they don't have a balance, or use cash advances. But if they have a monthly balance that they revolve be sure to understand that this is an actual loan. Like any other lender, the lender hopes to earn interest.
What is the reason rates are so high?
Unsecured loan: Credit cards are usually unsecured, meaning there's no collateral -- no asset that the lender will be able to take if the borrower fails to pay. It's different from the aforementioned , which requires an upfront deposit as collateral or loan for a home or vehicle, which is something a lender can repossess and resell to receive a portion of the money back. This is why banks don't give you the title to your vehicle for instance, until you finish paying your auto loan. And unsecured credit card balances aren't backed by anyone other than the promise of payment or pay, for example, the federal government backing some student loans.
Nerdy Tip
The default of a credit card, also also referred to as charge-offs, are when a bank gives up trying to collect the debt. Charge-offs were found to be in the range of 3% to 4% range from 2012 until 2019, but spiked past 10% in 2009 and 2010 following recession, according to data provided by the Federal Reserve Bank.
Uncertainty: Unlike other kinds of loans credit card companies don't inquire about why you require the cash. It can be used to pay for medical bills or car repair or to play blackjack at a casino or purchase bobblehead dolls. The banks aren't able to tell you how much you'll be borrowing. It could be zero or even your maximum credit limit. This uncertainty poses an opportunity for the lender.
Profit: The majority of card issuers exist to make money for shareholders or, in the case of credit unions, channel profits into benefits for their members. Credit card interest revenue helps increase bottom line profits 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 higher when compared to automobile loans as well as mortgages. are used to seeing in the single digits for those who have good credit. But credit card rates aren't as high when compared to rates that can be well over 100% APR.
In the first half of the year, the median interest rate for credit cards was around 17%, among accounts assessed interest in accordance with the Federal Reserve. The NerdWallet study found that rates have risen 35% in the last five years.
Why rates vary
Credit rating In essence, consumer credit ratings are supposed to show the probability that you'll be able to repay any loan which includes a debt on your credit card. The people with higher credit scores for instance, those with better credit scores, pay lower rates as their probability of default is less. This is the reason why interest rates on credit cards are expressed as a range, to reflect rates charged to consumers with good, average, and bad credit.
If banks believe in you more and believe that their risk is less and they offer you a lower interest rate.
You can get your from NerdWallet.
Market conditions the credit card market is competitive, so finance charge rates are mostly similar among major issuers. Additionally, they tend to change in sync with current rates of interest, which are often linked to a benchmark known as the prime rate. The rates charged by cards are typically the prime rate plus some fixed number of percentage points. When the rate of prime is 5 percent and your card is charging 10 percentage points in addition to the prime rate, your APR is 15%.
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How can you avoid high rates
Pay off the balance: If you don't have any monthly bills and you're not a cardholder, you do not have to worry about what rate your card issuer charges.
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Lower your rate It is possible to use a variety of strategies to , including negotiating a lower rate, using credit cards that allow balance transfers or, in the long term, . Credit unions are a great spot to find credit cards with low-interest interest rates.
The author's bio: Greg Karp is a former NerdWallet writer, and an expert in personal finance and credit cards. He worked previously at The Chicago Tribune and wrote two money books.
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