Why are credit card interest rates so high?
Editor's Note
High interest rates are one of the biggest drawbacks of using a credit card to borrow money.
While you can avoid paying credit card interest by following TPG's first commandment of credit cards and ensuring that you always pay your balance in full, if you do carry a balance, you'll encounter interest rates much higher than other types of loans.
In this article, we'll explore the factors that go into setting credit card interest rates and share some tips on how to avoid paying a high credit card annual percentage rate, or APR.
What is APR?
The term APR is short for annual percentage rate, and it refers to the annual cost you pay to borrow money from a credit card company or other lender.
Credit cards will charge either a fixed or variable APR. Fixed APRs are set by the credit card issuer and do not change. Variable APRs are set based on market conditions and can be subject to change. Most credit cards have a variable APR that is determined by the prime rate.
APRs can also vary depending on how you use the card. For example, most credit card companies charge different APRs for purchases, balance transfers, cash advances and penalty APRs (if you violate the credit card terms).
Some credit cards offer an introductory APR for promotional purposes. This is often a 0% interest rate for a specified period of time. If you plan to carry a balance when you first apply for a credit card, we recommend getting a card with a zero APR introductory offer to avoid paying any interest for a specific period.
Related: Best 0% APR and low-interest credit cards
Why is my APR so high?
Credit cards generally have higher interest rates than other types of credit, such as personal loans and mortgages. There are several reasons for this.
For one, credit cards provide a grace period on card purchases, meaning that you won't pay any interest as long as you pay the purchase balance in full by the due date.
Also, unlike a mortgage or new car loan, credit cards are unsecured loans, so the lender is taking additional risk by not requiring you to provide any collateral in exchange for the money you're borrowing.
Credit card companies also must incur higher processing costs due to the sheer volume of daily credit card transactions that are processed.
Last but not least, credit card companies spend millions of dollars each year protecting (and reimbursing) cardholders from credit card fraud, which is as prevalent as ever. Credit card companies must recoup these costs from the interest rates they charge.
Of course, we must also remember that credit card issuers are looking to make a healthy profit on the money they lend out. This is also reflected in high APRs and other fees they charge to their users.
Related: What is purchase APR on a credit card?
Why did my APR go up?
Sometimes, you may notice an increase in your credit card's APR. Here are a few possible explanations:
- Missing a payment: Missed payments can result in your credit card issuer replacing your regular APR with a much higher penalty APR.
- Your promotional period ended: If you were approved for a credit card with an introductory APR offer and that period has ended, your APR will increase.
- Variable interest rate: This rate depends on a number of factors and can increase periodically throughout the year.
- Your card balance is high: If your card has a variable APR, your credit card issuer may increase your rate if your credit card balance remains high.
- You used a cash advance: Cash advance APRs are higher than APRs charged on credit card purchases.
If you are carrying a balance on your credit card, you can always call your card issuer and ask for a reduction in your APR if you have a good history of one-time payments. They may not approve your request, but it never hurts to ask.
Related: How to avoid and reduce credit card interest
How to avoid a high APR
Let's look at a few ways you can reduce your credit card APR or avoid paying interest altogether:
- Pay your balance in full every month: Again, we here at TPG can't emphasize this enough: pay your balance in full to avoid paying credit card interest.
- Zero or low-interest cards: If you have good credit, you can access lower APR credit cards. This includes credit cards with 0% introductory APR offers.
- Request a lower APR: If you have been carrying a balance monthly and have a good payment history, consider asking your card issuer to reduce your interest rate.
As an avid credit-card enthusiast, I make a habit of paying my card balance off in full every month. I've even utilized zero APR introductory offers on a credit card when I've needed to make larger purchases.
This has given me the flexibility to repay the balance owed over several months without having to worry about high APRs or other credit card fees.
Related: Pros and cons of zero percent APR credit cards
Bottom line
Most credit card issuers charge variable APRs that can change based on various factors. Our prediction is that interest rates will generally go down in 2025, though not significantly.
The good news is that by paying your balance in full each month, you don't have to worry about high credit card interest rates and APRs. If you must carry a balance, look for a card with a zero APR introductory offer.
Related: Fed cuts interest rates for first time in 4 years — how will it affect your credit cards?
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