Why Credit Card Interest Rates Are Out of Control

“People aren't just using credit cards because they're frivolous. People are using cards because they have to.”

By Georgia Parke, More Perfect Union

This should come as no shock, but credit card companies are ripping us off.

In the last decade, they have nearly doubled their interest rates — and last year, Americans paid $170 billion in credit card interest. We looked into what’s happening, and experts told us that credit card companies have been running an experiment to see how far they can stretch their profit margins beyond what’s necessary. A former Capital One employee was more blunt, telling us the companies operate like “loan sharks."

But ever-higher interest rates on credit cards might not be inevitable. A very unlikely coalition — including Sen. Bernie Sanders, Republican Sen. Josh Hawley, Rep. Alexandria Ocasio-Cortez, and even President Donald Trump — have proposed capping credit card interest rates anywhere from 10 to 18 percent. And smaller financial institutions have proven that it’s possible to offer lines of credit to borrowers at well below the rates of big banks.

We spoke to industry experts, advocates, consumers, and a former business manager for Capital One about the factors that got us to the credit card interest quagmire, and what our path out of it might be:

Drop us a comment or email stories@perfectunion.us if you have been affected by exorbitant credit card interest rates, or have ideas for other issues we should cover.

See below for a full transcript of the video.

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SAM BLACK, More Perfect Union producer: Over the last decade, America’s biggest banks embarked on an unprecedented experiment on all of us.

ADAM: The banks have figured out how far they can push it.

ELENA BOTELLA, former business manager at Capital One: They operate very similarly to how loan sharks used to operate.

SAM: At the center of it is one of the most important prices we pay: the interest rate on our credit card.

REPORTER: “Pull out your credit card, maybe go online tonight, and check your interest rate.”

REPORTER: “The average credit card interest rate, it is whopping. 24.8 percent!”

REPORTER: “Card balances are at a record high. So are credit card interest rates.”

SAM: We talked to consumers, advocates, and a former credit card company employee.

ELENA: We just took a business practice that used to be illegal and we made it legal.

SAM: What emerged is a story of how banks, freed from regulation, have pushed our credit card bills to the brink, and made record profits. And how an unlikely alliance may be emerging to take them on.

PRESIDENT DONALD TRUMP: “We’re going to put a temporary cap on credit card interest rates.”

SEN. BERNIE SANDERS: “Mr. Trump, that's a great idea. I'm going to introduce that legislation. Let's see how far it goes.”

JANI CASH, Philadelphia educator: So I think, of the cards I use the most, I use my Capital One cards, and there are two of them in here. My Amazon card. My Home Depot card. And this is another Capital One card.

JANI: I really started to look at my finances last year.

SAM: Jani Cash is an educator in Philadelphia. She has a mortgage, student loan debt, and credit card debt.

JANI: When I was in school I was taking out student loans, but I also worked, sometimes multiple jobs, and those credit cards were there to, like, meet that gap.

SAM: Last year, she worked with a financial counselor to look closely at her monthly expenses.

JANI: Once we downloaded all of my transactions across my different bank accounts or credit card accounts or this account, we categorized everything. Uh, one of those categories was like credit card interest. Seeing just how much money was, like, leaving my pocket because of interest was, it was very eye-opening. Across all of my cards, like when we quantified it, I think I was paying closer to $700 a month in interest on those credit cards. I was like, oh shit. Right. I was kind of just like, Oh my God, right?

SAM: Jani was paying nearly as much in interest every month as she was spending on her mortgage. Last year, Americans paid $170 billion dollars in credit card interest. Our interest payments are far higher than any previous generation. And that’s because of what has happened to credit card interest rates. In 2013, rates were on average 13 percent. Today, they’re 24 percent.

JANI: The lowest interest rate that I have is 22 percent. There’s like one that’s 22, one that's 25. And then everything else is 28, 29, 30. I think that banks are charging as much interest as they are because they can, right? It's the free market.

SAM: A credit card’s interest rate determines the charge you get hit with if you don’t pay off your monthly bill. It’s the price to borrow.

ELENA: If you're shopping for a credit card, you should really think of the interest rate as the price of the credit card. It used to be extremely uncommon to have what I would call mainstream credit card companies offer interest rates above 30 percent. Now, many credit card companies do.

SAM: Elena Botella worked at one of the biggest credit card companies, Capital One, from 2013 to 2018.

Capital One ad: “Banking at Capital One is the easiest decision in the history of decisions.”

SAM: She says that when she started, Capital One had a policy of not charging anyone, even the riskiest borrowers, more than a 25 percent rate. But then the company began an experiment.

Capital One ad: “How do you reimagine banking?”

ELENA: In the years right before I left, so 2016, 2017, they started to test, well, what happens if we go higher than that? They shifted from 24.9 to 26.9. Some of the last conversations I was a part of is, you know, when can we test above 26.9, right? Like, how quickly can we get a test in market to see what happens when we go with even higher interest rates?

Capital One ad: “Interest, huh? interesting.”

SAM: Elena showed me a timeline of those years, graphing the interest rates that Capital One offered each year, by mail, on one of their most popular cards. The bars in red are offers with a rate higher than 25 percent.

ELENA: Prior to 2018, almost nobody was given an interest rate above 25 percent. Starting in 2018 it starts to be 50/50. And then after 2018 it's sort of like this “no going back’ trend.” The idea is how high can you push the upper bound of the price. Capital One and all of its peers were recognizing, people will stick with their cards even when interest rates are very high.

REPORTER: “Right now Hugh, those rates are pretty much at record levels. Where are we going from here?”

MIKE ARMSTRONG, president of Armstrong Advisory Group: “I unfortunately just don’t have great news for you if you’re a borrower out there.”

SAM: Credit card companies say that they increased rates because of economic factors outside their control. But a look under the hood, at how interest rates are actually calculated, reveals something different.

ADAM RUST, Consumer Federation of America: There are several components of what the cost of a credit card ends up being.

SAM: I spoke to Adam Rust, a consumer advocate, who explained that a credit card’s interest rate is made up of the federal funds rate, set by the federal reserve.

ADAM: There's that baseline cost, which is the cost of borrowing money.

SAM: Plus a margin, above that, set by credit card companies.

ADAM: But then there's what's left over, right? And that's the margin that leads to the profit.

SAM: In the last few years, the federal reserve raised the federal rate to fight inflation. So that explains some of the overall rise. But that still leaves a lot of explaining to do.

ADAM: What's interesting is, over time, you would expect: funds rate goes up, and then on top of that, the interest rates goes up. And these two forces would be similar. But what's happened lately is, it's sort of like this. That the margins have actually grown and they've grown especially at the largest banks.

SAM: The Consumer Financial Protection Bureau – the CFPB – says that half of the increase in credit card rates over the last decade was driven just by the banks raising their margins.

REPORTER: “The federal reserve started cutting rates in September, but credit card rates have barely budged. So why is that?.. Can folks expect that credit card rates will come down anytime soon?”

TED ROSSMAN, industry analyst: “Not by much.”

SAM: Now, banks will say there’s another reason our rates have gone up: “We’ve had to charge more,” they say, “because it’s become riskier to lend to people.” But the problem is: the evidence actually shows the opposite.

ELENA: The long run trend over the last 10 years has been that credit card defaults have been stable or even actually a little bit declining, while the credit card interest rates and profit margins have gone up. So there's basically no relationship between the two.

SAM: For years, the credit card interest margin rose and fell in alignment with something called the charge-off rate, which indicates the risk lenders face from users who don’t pay their bills. But then, around 2012, that relationship broke down. The charge-off rate declined. But the margin kept going up.

ADAM: So the story doesn't hold up. There should be a relationship between the charge off rate and the interest rate. What the CFPB’s data shows is that interest rates are climbing faster than these baseline expenses.

SAM: The CFPB found that, just in 2023, the major credit card companies earned about $25 billion in additional revenue by raising that margin on consumers. So why don’t people just switch to a card with a cheaper interest rate? Wouldn’t that bring down rates by forcing the companies to compete for customers?

The problem is that the real prices of credit cards are hidden. Banks market credit cards based on something entirely different than their interest rate. Their rewards. Picking a card based on rewards only works out for you if you can afford to pay off your balance every month.

ADAM: 27 percent of people receive 94 percent of the rewards.

SAM: So rewards just distract people who borrow from the price they’re actually paying: the interest rate. You can try to comparison shop yourself. But here’s what you’re going to find.

ADAM: When a customer goes online to search for a credit card, they're taken typically through Google to a website that declares itself to be a comparison site where you can find the best cards. Those aren't actually the best cards. Those are the cards that pay the highest fees to that website. If you click through and fill out an application, that site will earn a hundred dollars, maybe $200, depending upon the card. That's the business. They're selling you to the banks.

SAM: It all means that the market for credit cards doesn’t really function properly, as a market. Ten large banks dominate, holding over 80 percent of credit card balances, even though they offer higher interest rates, on average, than smaller banks or credit unions.

ROHIT CHOPRA, Former CFPB Director: “Many consumers don’t even know the ways that they can take their higher rate balance to a lower one.”

REPORTER: “Some cards have gotten up to 36 percent this year. So where are we going to go from here? Are we going to go up to 40?”

SAM: Do we really have to just accept ever-increasing rates? Right now, there is no legal constraint on what credit card companies can charge. But it hasn’t always been that way. For many years, interest rates were capped at the state level. That changed in 1978 when the supreme court allowed banks to charge whatever interest rate they wanted as long as they registered their headquarters in a state without a cap. The banks fled to permissive states like Delaware and South Dakota, making those state caps irrelevant. But there’s now an unlikely political coalition coming together that wants to cap interest rates again.

SANDERS: “No bank in this country should have credit card interest rates over 15 percent.”

SAM: In 2019, Democrats Bernie Sanders and Alexandria Ocasio-Cortez proposed legislation to cap credit card rates at 15 percent nationally. Republican Josh Hawley has proposed an 18 percent national cap. And President Trump – who shut down the Consumer Financial Protection Bureau and fired its director – has at the same time said he wants a rate cap, at least temporarily.

Trump: “And while working Americans catch up, we’re going to put a temporary cap on credit card interest rates at 10 percent. We have no choice.”

SAM: Just weeks into Trump’s term, Senators Sanders and Hawley proposed a new bill that would do just that: cap rates at 10 percent, for about five years. Any cap is sure to face intense opposition from the financial industry, which spends tens of millions of dollars a year lobbying the federal government.

MICHAEL STRAIN, American Enterprise Institute: “I think you’ve got a situation where the progressive left is for something, and the kind of populist, nationalist right is for it, typically when those two groups are agreeing, the policy is bad.”

SAM: The banks and their defenders argue that if we cap their rates, they’ll be forced to stop lending to people with lower credit scores.

ADAM: From industry, we've heard kind of the same set of scare tactics that have always been out there.

MICHAEL: “This is a policy that would lead credit card lenders not to extend credit to people with relatively low credit scores.”

SAM: But we know that’s not necessarily true, and for a simple reason.

ADAM: So the proof that the larger banks could offer a product at a lower rate is that that's already happening, except it's happening typically by smaller banks or credit unions. Banks could offer the same product at a lower rate. It's just a question of how much profit is necessary.

SAM: Here's my two cents. We need to make it easy to shop for credit cards like any other product: based on their actual price. The CFPB has created a credit card comparison tool with interest rate transparency and no paid advertising. Go check that out – it could save you a lot of money.

But better shopping alone won’t bring down prices fast enough. We also need a national cap. The cap should be pegged to the federal rate, so that we’re capping that margin – where the industry takes its ever-expanding profit. That would save credit card users billions of dollars – money we would spend in the real economy, buying things we actually need.

ADAM: Interest rates sounds like something kind of abstract, but what it means is that people have less money to spend on other things.

JANI: Banks are able to monopolize a big chunk of the money that people would be spending in the economy in other ways. For me, having those interest rates capped would mean that I would be able to pay down my debt faster. People aren't just using credit cards because they're frivolous. People are using cards because they have to.