With average credit card interest rates at an all-time high, snagging a lower rate could help reduce the interest you pay and enable you to get out of debt more quickly.

The 49 percent of cardholders who carry a credit card balance (according to a Bankrate survey) are currently paying an average interest rate of 22.75 percent for the privilege of using their cards. And if your credit card is issued by a large bank, your interest rate is likely to be higher than if a smaller bank or credit union issued your card, according to a recent report from the Consumer Financial Protection Bureau (CFPB).

Large banks charge higher interest rates, irrespective of credit score

According to the consumer protection agency, the 25 largest credit card issuers charged interest rates that were 8 to 10 percentage points higher than those offered by smaller banks and credit unions.

For the average cardholder, this means $400 to $500 more in annual interest payments. Moreover, this pattern of large banks charging higher interest rates holds good regardless of whether a cardholder had a poor, good or excellent credit score. Some cards from the largest issuers even had interest rates higher than 30 percent. The CFPB also reports that many co-branded retail credit cards, or so-called private-label cards, offered rates higher than 30 percent. In fact, a recent Bankrate survey on retail cards found that the average retail credit card interest rate hit a high of 28.93 percent last year.

Large issuers also were more likely to charge annual fees, with 27 percent of their card offerings charging this fee, compared to 9.5 percent for smaller issuers. And the average annual fee charged by the largest issuers was $157, compared to $94 for the smaller issuers.

These findings are based on a survey the CFPB conducts periodically of card issuers — specifically, 156 issuers in the 2023 survey — on the terms of their credit card plans. The survey includes input on all general-purpose credit cards from the 25 largest card issuers, as well as a sampling of cards from smaller banks and credit unions.

While there is generally no cap on credit card interest rates, credit union card rates are capped at 18 percent, per the Federal Credit Union Act.

 What’s behind big banks’ higher credit card rates?

One factor the CFPB points to as behind high card interest rates is the big mark-up that card issuers charge over the prime rate. This is true even as the risk of consumers’ defaulting on their credit card loans has gone down in the years following the Great Recession (during which issuers priced in the high risk of defaults to charge higher rates).

According to Adam Rust, director of financial services at Consumer Federation of America (CFA), a consumer advocacy group, the high interest rates that large banks charge are driven by the aim of “recouping the cost of customer acquisition,” which drives up their marketing outlays. These banks constantly send out card offers to consumers and also tend to advertise on large digital comparison shopping sites more than smaller banks and credit unions.

Amanda N. Jackson, director of consumer campaigns, Americans for Financial Reform (AFR), a nonprofit coalition, pointed to a lack of competition driving higher interest rates. She noted, “When banks can enjoy high-profit margins that are not competed away in the name of serving customers, a market lacks effective competition. That is the key problem with credit cards.” 

Is there a lack of competition in the credit card market?

The CFPB, too, sees a lack of competition in the credit card marketplace as being behind this pattern of bigger issuers charging higher interest rates. Currently, the top 30 credit card issuers account for 95 percent of credit card debt, the agency reports, and this lack of market competition seems to give these big banks more pricing power.

However, the banking industry begs to differ. According to Sarah Grano, a spokesperson for the American Bankers Association (ABA), a banking industry trade group, the CFPB is disregarding facts. “The CFPB’s own data shows that interest rates are set in a highly competitive credit card market, which offers consumers a wide range of options to find the card that best meets their needs,” she said. “For example, some consumers may want a card with a lower rate while others may prioritize rewards programs or other card features that are important to them.”

Echoing this view, the Consumer Bankers Association (CBA), another banking industry trade group, noted in a media release that there are more than 640 credit card products and about 4,000 banks in today’s “highly competitive” credit card marketplace.

“Just like any other market, people use different credit cards for different needs or preferences in their lives. Sometimes a consumer just wants a drive-thru hamburger. Sometimes a consumer wants a steak. A thriving marketplace means that consumers can choose products that may have different prices and offer features, perks, or other value that’s specific to them.”

Consumer Bankers Association (CBA)

The CFPB declined to comment on a Bankrate inquiry about whether the proposed merger of Capital One and Discover (two large card issuers) would serve to further cut down on competition in the credit card marketplace.

However, according to AFR’s Jackson, “Bank consolidation poses increased systemic risk in the financial system. [Capital One and Discover] are two of the top 25 institutions with the highest credit card rates. A merger would likely increase their power at the expense of consumers, threatening financial security and access to credit.”

And CFA’s Rust noted, “The prospect of an even larger credit card issuer raises concerns. I can’t see how it can’t have a negative impact on competition [in the credit card marketplace].”

CFPB is looking to promote card market competition

The CFPB is taking some steps to make the credit card marketplace more competitive. CFPB Director Rohit Chopra said in the agency’s press release, “With over $1 trillion in credit card debt outstanding, the CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year.”

For one, the CFPB is proposing an open banking rule that would give consumers more control over their financial data. This rule would promote competition since banks would have to share a customer’s financial data with other lenders if the customer asked them to. This would make it easier for consumers to switch to a lender that offered them better terms.

The CFPB is also looking to make it easier for consumers to comparison shop for the best credit card interest rates. Banks tend to compete on the basis of rewards, sign-up bonuses and introductory rates, and consumers tend to be lured by these offerings without adequately weighing high interest rates.

Rust advises, “It’s important for consumers to realize that if they carry a balance, they will spend more (in interest payments) than they will earn in rewards.”

However, Jackson doesn’t see facilitating comparison shopping as making up for efforts to effectively regulate credit cards. She said, “There are too many abusive practices that are too widespread in this business to expect that comparison shopping will solve the problem.”

How to get a better credit card rate

Although efforts are underway to increase competition and lower credit card interest rates, how can you, as a consumer, get a lower interest rate in the meantime? Consider the following tips:

  • When shopping for a credit card, take into account the interest rate, rather than focusing on rewards, sign-up bonuses and other incentives. If you plan to carry a balance, the interest payments you make will easily outpace the value of the rewards you earn.
  • Cards tend to offer different interest rates on purchases, balance transfers and cash advances. Look into what interest rate issuers charge for these different categories and choose the card that offers the best rate for your purposes.
  • If a card offers a 0 percent introductory promotional rate, make sure you understand what your interest rate will be once the promotion ends.
  • Issuers sometimes advertise an interest rate range for a card, rather than a specific rate. You will only know your exact interest rate once you are approved for a card. Make sure that you will be ok with a rate on the higher end of the range before you apply.
  • Compare cards’ fees, such as a late payment fee and any annual fee, which will drive up the cost of the financing for you.
  • If you are looking to do a balance transfer, consider that there will be a balance transfer fee in the range of 3 percent to 5 percent.
  • If a card has a penalty interest rate, find out what that is and how long it might apply.

Finally, according to Rust, “The CFPB data suggests consumers should go directly to their local bank or credit union instead of going to a comparison site or going with offers that come in the mail.”

The bottom line

Based on a survey of the terms of finance of various card issuers’ credit card plans, the CFPB finds that larger banks tend to charge higher interest rates than smaller banks, regardless of consumers’ credit scores. One factor the CFPB points to as contributing to this trend is a lack of competition in the credit card marketplace — a situation that the consumer protection agency is looking to address.

To get better interest rates, consumers should weigh a card’s interest rate against any rewards and incentives it offers, as carrying a balance with a high interest rate will eat into any rewards they earn. You should also take into account a card’s fees and different interest rates on various balances, such as purchases and cash advances. Ultimately, your best recourse might be to turn to a smaller bank or credit union.