Why are Credit Card Interest Rates so High?

The interest rates charged on credit cards seem pretty outrageous, some might even stretch beyond the 55% annual percentage rate (APR), which is far higher than mortgage or auto loans.

The average credit card interest rate or the finance charge is somewhere around 45%. This credit interest rate is charged by the creditor on the amount borrowed by the borrower. But this interest is only charged when the cardholders are unable to pay their balance in full.
Suppose, your credit card bill for the previous billing cycle comes out to be Rs. 20,000, and you want to make a partial payment rather than paying the whole amount, either the minimum amount due or lesser than that, the bank will put in the finance charges as per its policy.

Usually, these interest rates or finance charges have the Average Annual Percentage Rate (APR) for credit ranges from 35% to 52%. These interest rates are this high because the loans underlying those balances tend to default at a higher rate than the other types of loans.

As for the reasons for these high-interest rates going beyond the corporate profits or seemingly greed, it can be the risk factor. If you have any loan like a mortgage or car loan, the bank can take your house and car if you make a default. However, if you default on credit card payment, the issuer can mostly wreck up your, credit score or sue you even where there is no guarantee, they will get their money back.

If we talk about finance, the more risk you take, the better potential of your returns you can expect. For banks and other card issuers, these credit cards are very risky because a lot of card users pay late or even don’t pay at all. So mostly the high Credit card interest rates are for the compensation of that risk.

Reasons why Credit card Companies have very high-interest rates?

Unsecured Loans: –

Credit cards are not like most loans where you keep one of your assets as safe keep or collateral. Meaning that even if you do not pay your credit card bills on time or even at all, there isn’t anything that the bank has secured from you to get the value back of its money after reselling it. This is also the reason why the banks do not give you the title of your car or house until you pay off the loan as a whole.
An unsecured credit card balance is typically not backed up by anyone else’s promise to pay.

Uncertainty: –

Unlike other loans, credit card issuers don’t ask you questions like why you need the money or whatever your plans are. You can use that money to do anything, be it paying your medical bills, traveling, shopping, or even playing at some casino. And the banks don’t even know how much you will be borrowing although you cannot go out of your credit limit. But still, there is uncertainty about the amount of time which is a direct risk to the card issuer.

Profit: –

Most card issuers in business make a profit for their shareholders. Credit card interest revenue is very helpful in boosting the bottom lines and pit also pays for the lucrative benefits of rewards credit cards and 0% transfer cards. The rate of return on the investment tends to be very high because they charge a very high-interest rate on the late payment.

Apart from the profit, credit card issuers also face a very high risk of facing losses when the borrower does not pay the balance due on time. These losses occur when the borrower makes late payments or does not make any payments at all. And there are even times when the creditor or the bank stop trying to collect the debt, then this is called a charge-off.

While the rates seem high on the credit cards but that also depends on the suitable comparison. As compared to other types of loans like mortgages, or auto loans, where the interest rates are majorly on a single digit, even the Low-interest credit cards are very high. But credit card loans are not high for everyone, the interest rate on the loans depends from card to card.

Some cards look pretty decent as compared to high-interest ones. These cards usually vary in their interest rates, you can get some of the cards with just 35% as their starting interest rate, however, the rates for some of the cards can go up to as high as 52% interest charges on the same.

There are some very high-end or top-notch cards as well which can give you interest rates starting from 20% but they have high eligibility criteria and can be counted as luxurious credit cards.

Bottom Line

The interest rates on every credit card are pretty high. But interest rates of different banks are co-dependent with your credit score as well as your history with the card issuers. It is not that these financial charges cannot be lowered by any cost. The issuers expect consistency.