Credit card rates remain high for two main reasons, according to a new study from the New York Fed: steep operating costs and undiversifiable risks. An economic downturn could threaten an issuer’s entire portfolio, making risk management a key factor in pricing.
Although the average credit card interest rate currently sits at a lofty 20.09%, it has eased slightly from a record high of 20.79% in August 2024. A decade ago, in late 2013, the average rate was just 12.9%—meaning it has nearly doubled over the past 10 years.
The New York Fed sought to understand the drivers behind these high rates. Their research found that credit card operations come with exceptionally high operating expenses, ranging from 4% to 5% of total balances annually.
Issuers like Capital One have become some of the world’s top marketers, with advertising budgets comparable to Nike and Coca-Cola. On average, credit card banks allocate 1% to 2% of their assets to marketing—ten times more than traditional banks. These costs account for about half of default-adjusted APR spreads.
Additionally, banks with higher operating expenses tend to charge substantially higher interest spreads and enjoy greater gross margins. This suggests that large credit card banks wield considerable pricing power, but they need to incur sizable expenses to maintain that power.
Unable to Diversify the Risk
Credit card rates incorporate a large default risk premium because the risk of default is undiversifiable. No matter the cardholders’ credit rating, charge-offs tend to rise during economic downturns. As a result, default risks become particularly high in times of economic distress.
The study also found that issuers’ returns strongly decrease as FICO scores improve. The average interest rate spread is 14.5%, though it varies widely depending on the borrower’s credit score.
“At the super-prime level, where scores exceed 800, the spread is less than 10%,” said Brian Riley, Director of Credit at Javelin Strategy & Research. “On the other side of the coin are subprime scores of 650 or less, where rates are 18% and beyond. The interest rate spreads ensure that an excellent cardholder does not subsidize the risk of a less creditworthy customer.”
Disregarded Factors
The Fed study also examined two other commonly cited factors behind rising interest rates. The first was the notion that default risk is higher because credit cards are unsecured, unlike other types of loans backed by collateral. The second was the impact of credit card rewards, with the six largest card-issuing banks spending $67.9 billion on rewards in 2023 alone.
While these factors may contribute to higher rates, the Fed determined that their overall effect was minor.
