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Discussion Paper
Why Are Credit Card Rates So High?
Credit cards play a crucial role in U.S. consumer finance, with 74 percent of adults having at least one. They serve as the main method of payment for most individuals, accounting for 70 percent of retail spending. They are also the primary source of unsecured borrowing, with 60 percent of accounts carrying a balance from one month to the next. Surprisingly, credit card interest rates are very high, averaging 23 percent annually in 2023. Indeed, their rates are far higher than the rates on any other major type of loan or bond. Why are credit card rates so high? In our recent research paper, ...
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Credit Card Banking
Credit card interest rates currently average 22 percent, an 18 percent spread over the short rate. This spread far exceeds that on any other loan or bond, yet nearly half of households are credit card borrowers. Why are credit card rates so high? To understand this, and the economics of credit card banking, we use regulatory account-level data to analyze the lifetime cash flows of 550 million monthly accounts, representing 90 percent of the U.S. credit card market. While charge-off rates are comparatively high, averaging around 6 percent, they explain only a fraction of cards’ spread. ...