You have what in your wallet? a credit card with interest rates significantly greater than those of any other significant lending type.
Why are credit card interest rates so high? After investigating the issue, the New York Federal Reserve identified two main causes.
It should go without saying that card issuers impose large fees in order to offset the risk of consumers defaulting, or not making their transactions. Credit cards are responsible for more than half of all default losses that banks incur annually.
However, the Fed discovered that credit card interest rates are set higher than what would be required to make up for banks’ losses. This implies that banks are basing interest rates on the most worst risk scenarios, such a recession.
An additional factor? Large sums of money are spent by the banks that have the most credit card customers to advertise their cards online, on television, and in print.
Compared to other bank lenders, credit card issuers invest ten times as much in marketing and advertising.
According to the survey, American Express (AXP) and Capital One (COF) are the largest card advertisers. Capital One spent $4 billion and American Express spent an expected $5.2 billion in 2023.
Popular songs or celebrities, like Samuel L. Jackson, are included in a lot of these TV commercials.
“The largest credit card banks rank among the world’s top marketers, with budgets comparable to consumer giants like Nike (NKE) and Coca-Cola (KO),” according to the study’s authors.
By charging higher interest rates to both high-risk borrowers and higher-income clients who rarely, if ever, default, these banks are also able to increase their revenues from credit cards.
The study’s most unexpected finding was that credit card benefits like cash incentives, airline miles, and bonus points most likely had little to do with the high rates.
According to the New York Fed, these benefits cost the six biggest credit card corporations “a staggering $67.9 billion” in 2023. However, the Fed determined that the fees banks recovered from shop merchants more than offset the cost of the rewards.
Credit cards have become essential to the American economy despite their high interest rates. At least one is owned by three-quarters of all American adults. According to the Fed, there were 580 million credit card accounts in the US in 2023.
In 2023, 70% of all retail sales in the United States were made using credit cards, purchasing $6 trillion worth of goods and services.
Legislators from both parties have suggested capping credit card interest rates, but it doesn’t seem like a law will be passed anytime soon.
