Why are credit card rates so high?
libertystreeteconomics.newyorkfed.org
libertystreeteconomics.newyorkfed.org
Why and how does _credit_ becomes the first and default way of payment?
Credit cards are expensive short term financing.
https://www.healthsystemtracker.org/brief/the-burden-of-medi...
https://www.stlouisfed.org/on-the-economy/2024/may/which-us-...
US Consumer Debt Delinquency Hits Highest in Almost Five Years - https://www.bloomberg.com/news/articles/2025-02-13/us-consum... | https://archive.today/ivRqd - February 13, 2025
Record Share of Americans Pay Only Minimum on Credit Card Bills - https://news.bloomberglaw.com/banking-law/record-share-of-am... - Jan. 22, 2025
Philadelphia Fed: Card Balances and Delinquencies Continue Upward Trajectory; Mortgage Originations Stagnate - https://www.philadelphiafed.org/surveys-and-data/2024-q3-lar... - January 22, 2025
St Louis Fed FRED: Consumer Loans: Credit Cards and Other Revolving Plans, All Commercial Banks (CCLACBW027SBOG) - https://fred.stlouisfed.org/series/CCLACBW027SBOG
(credit card balances total ~$1T outstanding as of this comment)
Some consumers may be stressed. That doesn't explain why credit cards use has dominated across all income ranges for decades.
It seems like you are trying to shoehorn a pet issue into an unrelated question.
Edit: you still seem to be missing the question. It isn't why credit debt is so high. The question is why so many people use credit cards. What you are saying may be true, but it is answering it an entirely different question.
>People would use debit cards if they had the funds.
This is the part that simply isn't true. The rich use credit cards too. Less than half of credit card owners carry a balance from month to month.
https://time.com/6957322/why-credit-card-debt-is-high/
> The higher cost of everything from housing to high-tops to haircuts are a major culprit. Although inflation has moderated since it peaked in June 2022, Americans—particularly lower-income families—are relying more on credit cards to cope with the sticker shock.
> “They used credit card debt to supplement their incomes to maintain their purchasing power,” says Mark Zandi, chief economist at Moody’s Analytics.
> A few years ago, low interest rates plus a host of pandemic-era programs—stimulus payments, enhanced food stamp benefits, pauses on student loan payments and eviction proceedings—made this new math work for families’ budgets. But those financial supports have been discontinued, and for borrowers who were barely treading water financially, these programs couldn’t have been eliminated at a worse time.
Credit card rates are high because they can be, if you need financing you have nowhere else to go except perhaps a payday lender or other hard money source. This is why there is recent talk of capping interest rates at 10%. People would use debit cards if they had the funds, they don't, which is also why overdraft fees were a source of billions of dollars in fees for commercial banks.
S.381 - 10 Percent Credit Card Interest Rate Cap Act - https://www.congress.gov/bill/119th-congress/senate-bill/381
Big banks have drastically cut overdraft fees, but customers still paid $2.2 billion last year - https://www.cnbc.com/2024/02/09/jpmorgan-chase-wells-fargo-c...
> MANY folks carry zero credit month to month
Even if 40% is 10x too high, and I'm pretty sure it isn't, 4% of all credit card holders is still a hell of a lot of people. As far as I can tell you haven't actually contradicted the claim.
With credit cards, it's the bank's money that's missing, not yours.
I know I prefer to only put the bank's money at risk, not my own.
It has no membership fee, I get 0.5% cashback which is free money, and one time a merchant failed to deliver an order and they gave me back my money within like 10 minutes of me raising a dispute
If I had used my debit card with my normal bank it would probably take a week to resolve, and I'd be the one out of pocket in the meantime
Why not?
That's of course still worse than not being out the money on a credit card, but it's not the dealbreaker many make it out to be, and could easily be amended by regulators if there was any interest in doing anything about the drag on the economy that are inflated card payment fees.
You mean the same regulators who just rescinded the cap on overdrafts?
And yes, regulations alone aren't enough, they also need to be enforced. That goes for both credit (Reg Z) and debit (Reg E), though.
” For debit card transactions, the Electronic Funds Transfer Act (EFTA) applies. While these laws offer some similar protections, knowing the differences is key to understanding why it's safer to use one type of plastic than the other... According to the EFTA, your potential liability for fraudulent debit card transactions is virtually unlimited. You have up to 60 days to report a lost or stolen card under the EFTA. After that, you simply lose whatever money was taken, even funds siphoned from linked accounts.”
You are on the hook for like $50 max of fraudulent credit card, and like $500 of fraudulent debit. If you don't catch debit in time, you might be liable for all of it.
Even under Regulation E, it would only be $50 as long as the issuer is notified within two days of losing your card, and $0 for other types of fraud (e.g. unauthorized use of your card number online) if reported within 60 days of receiving the corresponding monthly statement.
Process your debit as credit and bam.
The big caveat being you MUST pay the balance off each month to avoid paying interest otherwise you are losing money by using a credit card.
It really helps with one-off costly purchases, like a new device or some stuff for home/garden. I never miss card payments and keep my finances organized, avoiding purchases I can’t pay off monthly.
The problem is, most people don't do that.
In EU rewards are shit, and the only reason to keep credit card is to be able to rent a car during summer vacation.
In this day and age? Inertia?
Overdraft fees hit harder than interest
So Americans are forced to use credit cards and enrich the companies offering that service, because using a debit card carries risks.
At the aggregate level, it of course costs everyone dearly, since the cashback is ultimately just paid for by consumers anyway – minus generous issuer profits.
You shouldn't be keeping your savings in the bank, you should be keeping them in investments. When I charge something to my card, it's an average of 45 days until it gets debited from my bank account. That's 45 days that money can be in investments and profitable.
It doesn't matter much over just one or two months (and will be swamped by the direction of the market anyways), but over a lifetime it adds up.
Don't ever pay now when you can pay later, if you can invest your money during that gap.
- Point schemes. Every card has some sort of points system that encourages use. The best programs are often tied to specific products like airlines. Sometimes there are multipliers on specific categories of use like gas or travel. More expensive cards have better points programs.
- Protection. You pay with the bank's money, not yours. This means you have an extra buffer to protect against fraud, and the bank is more incentivized to resolve issues. On the flip side, banks can put pressure on merchants by raising/lowering their transaction rates if they are consistently bad actors.
- Card holder benefits. Often cards have extra things like car insurance for car rentals built into the card. They also give you access to a cash line of credit in emergencies.
- Builds credit. If you don't have other major debts like a mortgage or car loan, your credit score can be low, because the banks rate unknown borrowers as risky. Consistent credit card usage alone can give you a medium-high rating, so when you do need to borrow for a home, you can get a better rate. This is a bit of a racket overall, but its better than a random banker judging you based on their personal bias.
If you pay off your card in full every month, the only cost is the yearly fee, which varies by card, my current one is a mid range card for $50/year. Usually you need to spend a few hundred to thousand a year for the benefits to outweigh the cost. That said, this whole system preys upon those who don't pay every month/don't their card enough to benefit from it.
I was taught credit cards were dangerous, and stayed away from them for years. I'm glad I never racked up debt when I was younger. But as a responsible adult, they are a boon.
Available but unused credit helps your credit score.
Even though it isn't actually 0% interest, even 5% is an amazing credit interest rate.
https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...
The highlights in my own words:
- Credit cards are a powerful tool that many people do not use correctly. They enable 0% interest loans so long as you pay your balance on time. It's only when you are late on a payment that you pay any interest
- The vast majority of credit card spending is done by people in high income brackets
- Credit card issuers fight to attract those high income bracket spenders. That's because credit card issuers make money on every purchase that's made via interchange fees (effectively a toll paid by merchants). They do this via cashback reward programs.
- It's these interchange fees, not interest penalties, that issuers make most of their money
- The economics of all of this work better in the U.S., because it has more high income spenders compared to other countries
And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this. Credit cards, and by extension, their rewards programs, only work when you have enough high income spenders that enable toll collection (interchange fees) from merchants. Merchants respond by raising their average price (subconsciously or otherwise) to compensate. Folks on the high end of the income bracket are able qualify for the lucrative rewards programs. But folks on the lower end cannot.
In effect, the wealthy pay somewhere between 1-2% less on every transaction.
If everybody were "using them correctly", issuers would be bankrupt. The fact that they're not should tell you that there's at least one winner other than the never-balance-carrying cardholders.
> Credit card issuers fight to attract those high income bracket spenders.
Correct, and everybody pays for this (very expensive) fight, one way or another. The fact that some people come out ahead does not make them a good deal in the median case.
> And finally, something that's less well known: the folks at the lower end of the income brackets subsidize all of this.
I agree, but as an aside, you might be surprised to find that the author of the article you quote would disagree with you there: https://x.com/patio11/status/1902555603534295115
Additionally, having high credit limits, low usage, and older accounts improves credit scores for loans/etc.
No interest is charged if there is no balance carried statement-to-statement, so why bother with silly debit pins and such.
That's how it becomes the default way of payment; it's not really "credit".
Paying by credit card gets you:
A 0% loan for 4-6 weeks. Not huge but it's free money.
Better fraud protection (similar, but better; look it up)
A firewall between fraud and your bank account (fraudulent charges never hit your bank account balance, unlike debit cards where the money is gone and you get refunded later)
Cash back or points or other benefits. Not huge but it's free money.
The tl;dr is that it's not mostly due to defaults or for rewards programs.
But rather due to very high operating expenses (4-5% of dollar balances!) driven by marketing.
And also because the lending banks can't diversify. The risk of default is essentially magnified because you can't do anything if the economy turns bad and everybody starts defaulting together at the same time.
I think people with enough assets to secure such a card might be those less likely to carry a balance, but maybe a lower interest rate would entice them.
What's the difference between that and transferring your credit card balance to your HELOC? You don't pay any interest on credit cards within the grace period on your bill, so this only adds marginal convenience
But not against debt that you secured by it.
I would think the overlap between people who need to carry a balance on their credit card and those who have a HELOC (own a property with significant equity) or have a non-trivial stock portfolio, is rather small.
Good luck getting your money back from a bad merchant. Especially if it's A LOT of money.
https://www.nerdwallet.com/article/credit-cards/credit-card-...
To simplify:
- A Debit Card - It's your money on the line, and the bank has little interest in spending their money protecting it.
- A Credit Card - It's the bank's money on the line, and the bank has a lot of interest in spending their money protecting it.
Debit cards have the same liability protections, and there are debit cards with cash back as well.
It’s definitely less than 4x points back I get on groceries and dining on my Amex Gold.
The reason that companies are willing to pay higher credit card exchanges for Amex is because Amex users on average are bigger spenders.
But even Chase Visa cards that transfer to Hyatt hotels and you can get 3x back for groceries (by paying with grocery store app so it counts as “online groceries) you’ll get more than 5% cash back.
Then there is the whole r/awardtravel hacks of getting cheaper flights by transferring points to partner airlines like booking Delta domestic flights via AirFrance.
It has absolutely nothing to do with how much American Express cardholders spend and everything to do with what they charge vendors and some vendors or their payment processors accept Amex, or you don’t have a choice.
I know this because my firm accepts American Express and they are absolutely not our biggest spenders, but our downstream processors force us to raise prices.
Every Amex cardholder knows to carry a non Amex card. You wouldn’t lose business by not accepting them and some vendors don’t even domestically.
I can’t find stats for other cards. But here is the average wealth and income of Plat holders
https://monkeymiles.boardingarea.com/whats-average-household...
Amex cardholders are the highest earners in the industry.
Merchant side. 1. CC fees are high so we add 3.5% to the retail price of everything. Someone pays cash? Good, a small bonus. 2. Merchants are being charged the same for “debit” cards which allow electronic payments from bank accounts, coming with the same chargeback risks and fees as a CC.
So what the heck assume the worst for every transaction.
How to fix this. Does it need fixing? If the gov is going to push everything to electronic payments, you might as well get the rewards.
The trap, if you’re not paying off your balance every month, the rewards are nothing and the interest rate is crippling.
These are available on debit cards as well. (Both by law, i.e. Regulation E, and both Visa and Mastercard requiring issuers to provide zero liability policies to consumers.)
> 3. Rewards either points or “cash back”
Which consumers more than pay for themselves – all consumers, including those paying cash.
The UX for chargeback protection is not quite the same, though.
Say someone commits fraud and charges $1000 to my credit card. All that happens is 1. Some time later, I see the charge on my list of other charges, and 2. My bill is $1000 higher this month, which I dispute. Some time later, the CC company confirms it's fraud and the $1000 (and the interest) disappears from my bill.
Say someone commits fraud and charges $1000 to my debit card attached to my checking account. Between the time the fraud happens and the time the bank confirms its fraud (or otherwise restores the funds per their fraud-reporting policy), my bank account balance is now $1000 lower. Maybe some checks start bouncing. Maybe I needed that $1000 for an upcoming purchase, and it's not available for a short period of time. Yes, the numbers will all eventually be correct, but it's mayhem in the mean time.
https://www.federalreserve.gov/paymentsystems/regii-about.ht...
2. It gives you an itemized list of what you spent.
It reminds me of an article long ago that explained how Amazon could make money selling items at cost. a) they get paid by the customer right away b) they don't pay the vendors for 90 days. Thus, Amazon gets paid interest for 90 days on the volume of business they do, which is very large.
Not many people seem to understand the time value of money, certainly it isn't taught in school. It's not just about mortgage interest rates. It's everything that involves money.
Saves you versus... taking a 5% loan for the 6 weeks? You need to actually invest the money versus paying the credit card to earn interest. The average consumer is not walking around picking up pennies in front of a steamroller trying to get $30/month with clever interest rate arbitrage.
> Not many people seem to understand the time value of money, certainly it isn't taught in school
Realistically a person will take out loans for like 4-5 transactions in their life where this actually matters. House, car, student loans, maybe a small business. If you look at personal finance advice they usually use the "snowball method" of simply paying down the highest-interest debt first and reducing expenses.
And I do. I don't have any actual money. It's all invested. I look for ways to borrow money at a lower rate and invest it at a higher rate.
> Realistically a person will take out loans for like 4-5 transactions in their life where this actually matters.
Every time you buy something with a credit card, you take out a 0% loan for 6 weeks.
If you pay attention to what a bank does, if the bank hands you a check for borrowed money, they start charging you interest immediately. If you pay off the loan by handing them a check, they charge you interest until the check clears. I.e. the bank works the float both ways.
The pennies add up.
If you're not aware of this for a large transaction, the other party surely is and is taking advantage of you.
A few years ago, it was commonplace for late night TV to run seminars that I call "Make Money By Real Estate Scamming". I decided to watch one and see how it went. The presenter presented a series of transactions that ended up netting the buyer $15,000. It was complicated, so I set about figuring just how the $15,000 from nothing came about. It turns out it hinged on giving the sucker a bond that paid $X upon maturity in lieu of paying $X today. The $15,000 was the interest on the time to maturity. The complications were all about hiding this.
I asked my loan officer "why do they do these contracts?" He laughed and replied they were playing the odds - the vast majority of people are too lazy to refinance, or didn't read the contract.
Once I bought a new car, and they offered 0% financing after we agreed on a price. I asked, why would they offer 0% financing? The dealer said the terms of the contract were if you are late on a payment, you get hammered with interest. I said sure, I'll take the loan, and set up an automatic payment plan.
This is all basic stuff. The credit card thing is mostly just for practice.
They should be. Interest bearing checking is out there. No real danger there. It's not glamorous, but depending on how much interest you're getting, paying with tommorow's dollars for today's purchases gets you about 0.4% off (based on bad math of apy is 3.25% * 45 days / 365 days in a year; I know this isn't the right way to use an APY, but you can also find better interest checking than my credit union)
Mostly because people keep agreeing to pay a premium for the convenience of spending before the money comes in.
Yeah, except the sale for whatever you buy may expire before "later" comes. You'd save more money purchasing now and paying off the credit card a week or two later in that case. It's not always as simple as you describe.
So the cash back is just a partial refund on your credit card processing fees.
Cash also has cost - employee theft, risk of getting robbed while taking it to the bank, it takes more time to handle, etc.
If I had a business, I would not accept cash at all.
Loans and debt do not exist just because some people lack discipline.
It just doesn’t seem ethical to me (for my parameters) any more. :-/
I'd argue that this suggests another hypothesis that the article only partially considered: high interest rates are a cross-subsidy to attract the 40% of credit card users who never carry a balance, and the 40% of credit card users who never carry a balance are a marketing expense to normalize credit card use and make the 60% who do think it's completely acceptable to spend without a thought. I get literally thousands of benefits from the credit card company, and I don't pay a cent. That money has to be coming from somewhere, and I'd bet that it's coming from the 60% of consumers who pay usurious interest rates.
If you read the whole article, you would learn that it is actually coming from you, via the merchant. Which means you are likely paying higher prices. Now you pay the higher prices either way for the most part, so you may as well enjoy the kickback^W rewards.
When you're providing a service to one group at or below cost and making all your profits off another group or another service, that's the definition of a cross-subsidy, even if you do get a token amount of revenue off the first group.
I don't have to run the numbers, because I read the article where they did the actual research with real numbers, not your back of the envelope estimating, and they came to the opposite conclusion:
| This leads to our second hypothesis: High interest rates are necessary to recoup the high cost of rewards. However, our analysis shows this is not the case. Rewards expenses are more than fully covered by banks’ interchange income—fees collected from merchants based on purchase volume. On average, interchange income amounts to 1.82 percent of purchase volume, while rewards expenses are 1.57 percent.
They're certainly not the least expensive way for the merchant, but unless they pass the merchant "discount" as a line item, it doesn't make sense as a purchaser to use anything else. And even then, I think my current card involves the issuer paying me to use it, beyond the discount (4% cash back, but I think merchant fees top out closer to 3%). There's also the delay between time of charge and when the statement is due, although I think the merchant's receipts are also delayed.
Which card is this?
In my country, credit cards are safer because they offer better fraud protection mechanisms than debit cards.
Credit cards make it easier to spend money in foreign currencies. I’ve faced issues when trying to pay with a local currency debit card abroad, but I never have faced that issue with a cc. Then, I can just pay my credit card with local currency.
Most of these issues are solvable for sure. But as of today, credit cards are way more reliable than debit cards. At least for me.
I think credit cards do have very valid use cases today.
Sure, you ask someone who's 60 or 70 years old, they'll tell you debt is slavery, you'll end up paying back twice what you borrow, and if you're out of money at the end of this month and you take out a loan you'll be even worse off at the end of next month leading to a spiral of debt. Being disciplined with money is crucial to your family's wellbeing. Because they lived through periods of incredibly high interest rates and saw that stuff happening first-hand.
You ask a 40 year old, though? For most of their adult lives interest rates have been below 1% as the economy staggered from one financial crisis to another. Their lived experience is that buying a car on credit has almost no downsides, you certainly don't end up paying 100% more, you pay perhaps 5% more to get the car 2 years earlier. Even college-educated folk who operates spreadsheets for a living could convince themselves it was better not to pay off their mortgage, better to put that money into the stock market.
It remains to be seen how modern attitudes towards debt will respond to non-zero interest rates. I hope it doesn't go too badly...
The big pay-by-bank projects launching right now - https://www.americanbanker.com/payments/list/visa-mastercard... - October 25, 2024
Walmart Plans Instant Bank Payments, Cutting Out Card Networks - https://www.bloomberg.com/news/articles/2024-09-19/walmart-p... - September 19, 2024
FedNow Is Live - https://news.ycombinator.com/item?id=36801491 - July 2023
(if ACI, FiServ, or Jack Henry processes your payments today, you can accept instant payments without much more effort, inquire with them if interested)
Credit cards, in the US implementation where the issuer collects ~2% from the merchant and pays their cardholder a kickback from that, are both a cost to cash payers and very inefficient in general, but that's not the only way of doing things. The EU capped interchange fees at 0.3%/0.2%, for example, and purchase protection is still available just like before.
I think it is very symbolic and is a good example of differences between these two systems.