Looking for a Lower Credit Card Interest Rate? Good Luck.

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Looking for a Lower Credit Card Interest Rate? Good Luck.

Credit card debt is rising and purchasing a card with a lower interest rate can help you save money. But the challenge is finding one.

Smaller banks and credit unions typically charge significantly lower interest rates on credit cards than the largest banks – even for customers with excellent credit, the Consumer Financial Protection Bureau reported last week.

But online card comparison tools tend to focus on cards from larger banks, which pay fees to the websites when shoppers apply for cards, said Julie Margetta Morgan, the bureau's deputy director of research, oversight and regulations. “It’s pretty difficult to get a good deal on a credit card right now.”

For cardholders with “good” credit — a credit score of 620 to 719 — the typical interest rate at large banks was about 28 percent, compared to about 18 percent at small banks, the report said.

For those with poor credit — reflected in a score of 619 or lower — large banks charged an average interest rate of more than 28 percent, compared to about 21 percent for small banks. (Basic credit score is between 300 and 850.)

The difference in interest rates between large and smaller banks can mean an average interest rate difference of $400 to $500 per year for cardholders with an average balance of $5,000, the bureau noted.

“I was surprised by the gap” between the sentences, said John Pelletier, director of the Center for Financial Literacy at Champlain College in Burlington, Vt.

The difference is more than academic, as Americans have more than $1 trillion in credit card debt and delinquencies are rising.

The consumer agency said in its report that “a lack of competition is likely contributing to higher card interest rates at the largest card companies.” (The top 10 issuers accounted for 83 percent of credit card loans in 2022, although that was down from 87 percent in 2016, the bureau reported in October.) This week, a deal was announced to merge two major card issuers, Capital One and Discover, announced it is likely to face scrutiny from regulators amid concerns it would give larger financial institutions even more power to set higher interest rates.

In response to the bureau's report, the Consumer Bankers Association, a trade group that primarily represents large banks, defended the credit card market as “fiercely competitive” and criticized the bureau for making “disturbing, unsubstantiated” statements.

“A thriving marketplace means consumers can select products that may be priced differently and offer features, perks or other benefits tailored specifically to them,” the association said in a statement.

The bureau based its report on 643 credit cards offered by 84 banks and 72 credit unions in the first half of 2023. Most cards were available nationwide, while the remainder were offered regionally or in a single state. The report includes annual percentage rates (APRs) for general-purpose cards offered by the 25 largest card issuers (based on outstanding credit card balances) as well as a sample of small and medium-sized banks across the country.

The bureau collects data on credit cards twice a year in a survey; Last spring, the survey asked for more details, such as how credit scores affect interest rates.

The bureau noted that federally chartered credit unions have a legal cap of 18 percent on the interest rates they can charge. But smaller banks also had lower interest rates overall.

Fifteen card issuers, including nine of the largest, said they offered at least one card with a maximum rate of over 30 percent. These banks included household names such as Ally, Capital One and Citibank. (Many of these cards were “co-branded,” the office said, meaning they also bore the name of partners such as stores or airlines.)

A card's interest rate is of less importance to people who pay off their balance in full each month because they don't pay interest. These consumers may be more interested in using credit cards for “cash back” rewards or for points that translate into savings on purchases like frequent flyer miles or hotel stays.

But if you're a “revolver” who regularly carries a balance, a double-digit interest rate will likely negate any benefit from cash back or points. “You shouldn't choose a card based on points” if you typically carry a balance, said Adam Rust, director of financial services at the Consumer Federation of America.

However, many people underestimate the impact of interest rates on their credit card debt. “The immediate gratification of the purchase, coupled with the deferred payment burden, can dwarf the long-term financial cost that the APR represents,” said Sachin Banker, assistant professor of marketing at the University of Utah Business School, in an E -Mail.

People might pay more attention to card rates if they understood compound interest over time, Mr. Pelletier said. He calculates that someone with good credit and a card balance of $5,000 would save $42 per month if they used a card with the typical small bank interest rate instead of the large bank interest rate.

Even if you pay off your card balance regularly, it's a good idea to have a card with a lower rate, as an unexpected expense – a medical bill, for example – may require you to temporarily carry a balance.

The consumer agency has said it is considering creating a public search tool that would include a variety of cards from large and small banks. “We are actively looking into this,” Ms Morgan said.

The bureau already provides an online spreadsheet detailing the terms of the cards included in its survey.

The Independent Community Bankers of America, a trade group, offers a local bank search facility at www.banklocally.org. You can then search for ticket prices on the websites or call for information.

The National Credit Union Administration offers a credit union search facility. Many limit membership to certain groups, but some are more flexible.

Here are some questions and answers about credit cards:

Cards issued by large banks were three times more likely to charge an annual fee than cards issued by smaller banks, according to the consumer bureau report. Additionally, the average fee was higher at large banks – $157, compared to $94 at smaller banks.

Credit cards offer “unsecured” loans – meaning the debt is not secured by collateral, as is the case with a mortgage or car loan. If you don't pay your bill, the bank can't seize property to cover its losses and therefore charges higher interest rates to offset its risk. More recently, card fees have generally increased as the Federal Reserve raised its interest rate to curb inflation.

But in a separate analysis posted on its website Thursday, the consumer agency said card issuers had raised interest rates well above base rates, costing consumers more in interest.

An important factor in qualifying for a good interest rate is your credit score, which is based on the information in your credit report. Before you apply for a new card, check your report for accuracy. (A recent analysis by Consumer Reports found that complaints to the federal government about inaccurate credit reports have more than doubled since 2021.) You can view your report from the three major credit bureaus for free up to weekly at www.annualcreditreport. com.