You know the old saying: Bigger is better. But when it comes to credit cards? Maybe not so much.
The largest 25 credit card issuers charged customers interest rates that were 8 to 10 points higher than smaller banks and credit unions, according to a recent survey from the Consumer Financial Protection Bureau. And large banks were three times as likely to charge an annual fee compared to smaller institutions.
The average credit card interest rate sits at 20.75% as of Feb. 14, 2024, according to CNET’s sister site Bankrate, but interest rates can vary based on issuers and cards. Nearly half of the largest credit card issuers offer cards with a maximum purchase APR over 30%, according to the CFPB report.
With credit card debt surpassing $1 trillion and delinquencies on the rise, fees and interest charges can add up quickly and make it harder to pay off credit card debt. So is going small the answer? We’ll help you decide.
How do credit card issuers decide interest rates?
Most issuers set a credit card’s annual percentage rate, or APR, based on the prime rate. The prime rate is tied to the federal fund target rate, which the Federal Reserve sets depending on how the US economy is performing. If the Fed raises interest rates, your credit card’s rate is likely to follow.
However, the prime rate is only the starting point for how a credit card issuer determines its interest rates. Issuers may increase a card’s interest rate based on premium offerings like rewards. If a credit card offers an introductory 0% APR, it may charge a higher penalty APR if you miss a payment during the introductory period.
Most credit cards also have a variable interest rate, a range of rates that depend on an applicant’s creditworthiness as determined by the credit card issuer. When you apply for a credit card, the issuer will look at your credit score and income, among other factors. If the issuer considers you less likely to be able to repay money, your APR will be at the higher end of the range to mitigate the issuer’s risk.
Larger banks charged higher interest rates across all credit tiers compared to smaller issuers, the CFPB cited in its report that compared the median purchase APR for credit cards:
| Size | Credit score 619 or less | Credit score 620 -719 | Credit score 720 or higher |
| Large banks | 28.49% | 28.20% | 22.99% |
| Small banks | 20.62% | 18.15% | 15.24% |
A few percentage points can make a big difference. If you have a $5,000 credit card balance, you’d pay $400 to $500 more per year at the large bank’s median purchase APR compared to the small bank’s rate, the CFPB noted.
How do credit card issuers determine annual fees?
Annual fees are recurring charges typically billed once a year by the issuer. Most cards that do charge an annual fee offer premium perks or benefits that can add value to the card, although some cards available to borrowers with lower credit scores also charge an annual fee.
Fees typically range from less than $50 to hundreds or even thousands of dollars. Larger banks are more likely to charge annual fees -- and at a higher price tag -- than those at smaller institutions, the CFPB found. Larger banks’ credit cards averaged $157 in annual fees, compared to $94 at smaller banks.
How can you save on credit card interest and fees?
You can avoid paying interest on credit cards by paying off your balance in full and on time every month. If you’re trying to avoid fees, you can find many credit cards that don’t charge annual fees and still offer rewards and benefits.
If you currently have a balance, here are some ways to help you save money on interest and fees as you tackle your credit card debt.
1. Try a smaller bank or credit union
If you’re looking for a card with a lower interest rate, you may want to try a credit union or local bank. Credit unions are not-for-profit and typically charge fewer fees and offer better interest rates on their products.
By law, federal credit unions’ have a statutory interest rate cap currently set at 18%, and the CFPB found that small bank issuers tended to offer credit cards with lower APRs than larger bank issuers.
2. Take advantage of a balance transfer offer
If you don’t have a plan for paying off your debt in a short amount of time, you may want to consider a balance transfer credit card. Transferring your balance to a card with an introductory 0% APR can help you avoid interest charges for a while, although you’ll often have to pay a balance transfer fee.
And be sure that your repayment plan aligns with the introductory period the card offers so you can pay off your balance before you start accruing interest again.
3. Ask your credit card company to lower your rate
If you’ve been with your credit card company for a while and don’t want to switch, it doesn’t hurt to ask them to lower your credit card’s interest rate. You can call the customer service number on the back of your credit card and ask for an interest rate reduction. Be prepared to negotiate with information like offers you’ve received for lower interest rates.
There’s no guarantee you’ll get the rate reduction, but it could be a fast and easy way to reduce your interest rate.
4. Consider a debt consolidation loan
Interest rates for personal loans are generally lower than credit card interest rates and can offer a set monthly payment plan you can budget for. If you’re carrying a balance on multiple credit cards, debt consolidation could help you save money by allowing you to combine your debt into a new, lower-interest loan that’s easier to manage.
The bottom line
Credit card debt can be pricey enough with having to pay extra high interest rates and annual fees. Although paying off your credit card in full and on time each month can help you avoid these fees, there are steps you can take to save on interest as you work to pay off your balance.
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