Why Can Credit Card Companies Charge Such High Interest Rates? (2024)

FAQs

Why Can Credit Card Companies Charge Such High Interest Rates? ›

Credit cards are unpredictable

Card rates are high because they carry more risk to issuers than secured loans. With average credit card interest rates above 20.7 percent, the best thing consumers can do is strategically manage their debt. Do your research to make certain you're receiving a rate that's on the lower end of a card's APR range.

Whenever you use your credit card to make a purchase, the store must pay a behind-the-scenes interchange fee to process that payment. Most of that fee goes to the bank issuing the card, but companies like Visa and Mastercard also receive a smaller fee for processing the payment through their networks.

Your credit card company must send you a notice 45 days before they can increase your interest rate; change certain fees (such as annual fees, cash advance fees, and late fees) that ap- ply to your account; or make other significant changes to the terms of your card.

These laws limit the interest a lender may charge on a debt. But, federal court decisions and statutes have virtually exempted credit card companies from this rule. This is because credit card companies can charge customers, regardless of their state, the interest rates allowed by the company's home state.

A brief history of California Usury Law

With some constitutional amendments, most notably the 1979 constitutional amendment, Article XV, Section 1, California's usury limit is now generally 10% per year with a broader range of exemptions.

There's no federal regulation on the maximum interest rate that your issuer can charge you, though each state has its own approach to limiting interest rates. State usury laws often dictate the highest interest rate that can be charged on loans, but these often don't apply to credit card loans.

States Where Credit Card Surcharges Are Illegal

Maine. Massachusetts. New York (as currently interpreted) Puerto Rico.

Credit card companies are racking up losses at the fastest pace in almost 30 years, outside of the Great Financial Crisis, according to Goldman Sachs.

Asking your issuer for an interest rate cut can seem intimidating, but it doesn't have to be. The key is to do your research beforehand so that you can come prepared with the information you need to negotiate, like the details of your current card and how it compares to similar cards on the market.

Can I ask my credit card company to stop interest? ›

You can ask your credit card company to freeze the interest on your credit card, but there is no legal obligation for it to agree. The good news, though, is there are several voluntary codes of conduct most credit card companies have signed up to, which encourage them to help you if you are in financial difficulty.

The 5/24 rule is an unofficial policy that dictates that Chase won't approve you for its cards if you've opened five or more personal credit card accounts from any issuer in the last 24 months. Put simply, the number of cards you've opened in the previous two years will affect your approval odds with Chase.

New government regulations are slashing the late fees charged by many credit card companies. On March 5, 2024, the Consumer Financial Protection Bureau (CFPB) finalized a rule limiting the penalty for late payment to $8 per incident, down from an industry average of $32.

Your credit card rates are tied to the prime rate, to which issuers add a markup to arrive at your card's interest rate. The prime rate, in turn, is based on the Fed's target interest rate. This means that when the Fed starts hiking its target rate, the prime rate also goes up.

Defining a Debt Trap

A debt trap is when you spend more than you earn and borrow against your credit to facilitate that spending.

Credit card interest rates can make it harder to pay off your debt, but you may be able to negotiate a better rate or a limited-time offer by simply calling your credit card issuer. While it can some time and effort and your request may be denied, it doesn't hurt to ask.

Pay your monthly statement in full and on time

Paying the full amount will help you avoid any interest charges. If you can't pay your statement balance off completely, try to make a smaller payment (not less than the minimum payment).

Paying your bill in full.

If you pay your statement balance on time each month, you won't be charged interest on your transactions. "Paying your credit card in full every month is the best way to avoid interest payments," says John Schmoll, founder of the personal finance website Frugal Rules.