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Study Reveals Why Credit Card Interest Rates Remain Stubbornly High
Credit card interest rates, which averaged 23% in 2023, are significantly higher than any other major loan product primarily due to non-diversifiable default risk and banks' market power, according to research published by the Federal Reserve Bank of New York. The comprehensive study, which analyz...
Credit card interest rates, which averaged 23% in 2023, are significantly higher than any other major loan product primarily due to non-diversifiable default risk and banks' market power, according to research published by the Federal Reserve Bank of New York.The comprehensive study, which analyzed 330 million monthly credit card accounts, found that while high default losses contribute to elevated rates, they explain only part of the picture. Researchers determined that credit card banks have substantial pricing power, achieved through exceptionally high operating expenses -- about 4-5% of dollar balances annually -- with marketing costs ten times higher than those at other banks. The study estimated that exposure to aggregate default risk carries a premium of 5.3% per year, which fully explains the relationship between return on assets and credit scores.
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