Big Banks Charge Higher Credit Card Interest Rates Than Small Banks, Credit Unions: CFPB Report

Switching to credit cards from smaller financial firms could save people $400-$500 yearly, the report said.

This illustration picture shows debit and credit cards arranged on a desk in Arlington, Va., on April 6, 2020. Olivier Douliery/AFP via Getty Images

Larger banks and financial companies charged higher interest rates last year for credit cards while also engaging in “anti-competitive behavior” detrimental to customers, according to a recent report from the Consumer Financial Protection Bureau (CFPB).

“During the first half of 2023, small banks and credit unions tended to offer cheaper interest rates than the largest 25 credit card companies across all credit score tiers,” said the Feb. 16 report. The firms were found charging eight to 10 percentage points higher annual percentage rates (APR) or interest rates compared to their smaller counterparts. For a credit card consumer with an average balance of $5,000, using a small bank or credit union’s card rather than cards from big firms results in an average savings of $400 to $500 a year in interest rates.

“Nearly half of the largest credit card issuers reported offering cards with a maximum purchase APR over 30 percent.”

Some of the institutions with APR over 30 percent include 1st Financial Bank, Ally Bank, Capital One, Citibank, First Premier Bank, Synchrony Financial, TD Bank, and USAA Federal Savings Bank.

For people with poor credit, large banks charged an APR of 28.49 percent, while smaller firms charged 20.62 percent. For those with “great credit,” these rates were 22.99 percent and 15.24 percent, respectively.

CFPB suggested that a lack of competition in the credit card market “likely contributes to higher rates at the largest credit card companies.” The group found “high levels of concentration and evidence of practices that imply anti-competitive behavior in the consumer credit card market.”

In 2023, the top 30 credit card companies accounted for roughly 95 percent of all credit card debt in the United States. About half of the bigger banks stopped sending customer payment information to credit bureaus, thus “making it harder for consumers to find better deals,” the report stated.

CFPB also found that large firms offered incentives to shopping comparison websites to promote more expensive products than cheaper ones to credit card customers.

“These concerning tactics may limit price competition, prop up higher rates for consumers carrying a balance, and have the potential for harm.”

The organization recommended people look for cheaper credit card products at smaller banks or their local credit unions. “Ensuring that consumers can obtain attractive rates can save billions of dollars for households.”

In addition to interest rates, there was also a big difference in annual fees between large and small credit card companies.

“Products offered by large issuers were three times as likely to include an annual fee than those at small institutions. The average size of annual fees for the largest issuers was approximately 70 percent higher than at small institutions.”

While 27 percent of large credit card issuers charged an annual fee, only 9.5 percent of the smaller banks had such charges. Annual fees of large firms averaged $157 compared to $94 for smaller issuers.

“With over $1 trillion in credit card debt outstanding, the CFPB will be accelerating its efforts to ensure that consumers can access better rates that can save families billions of dollars per year,” said CFPB Director Rohit Chopra.

Rising Credit Card Debt

The CFPB report comes as household debt rose to $17.5 trillion in Q4, 2023, with credit card balances increasing by $50 billion to $1.13 trillion, according to the latest data from the Federal Reserve Bank of New York. On an annualized basis, approximately 8.5 percent of credit card balances were estimated to have transitioned into delinquency.

“Serious credit card delinquencies increased across all age groups, notably with younger borrowers surpassing pre-pandemic levels.”

Wilbert van der Klaauw, the economic research advisor at the New York Fed, pointed out that “credit card and auto loan transitions into delinquency are still rising above pre-pandemic levels.” This indicates “increased financial stress, especially among younger and lower-income households.”

According to a Bankrate credit card survey published last month, more cardholders are carrying balances month to month. In November 2023, 49 percent of cardholders were carrying balances forward, up from 47 percent in July and 39 percent in 2021.

“Over the past two years, Americans’ credit card balances have skyrocketed 40 percent,” Bankrate senior industry analyst Ted Rossman said, citing New York Fed data.

“And most cardholders’ rates have risen five-and-a-quarter percentage points during that span as a result of the Fed’s rate hikes meant to combat inflation. It’s no wonder, then, that we’re seeing more people carrying more debt for longer periods of time.”

Generation X was found mostly likely to carry credit card debt, followed by millennials, Gen Z, and then baby boomers. Women were more likely to carry credit card debt than men.

Income-wise, 56 percent of cardholders who have household incomes less than $50,000 per annum carried credit card debt. Among those who made $100,000 or more annually, only 38 percent carried such debts.

“While Americans are managing their credit card debt pretty well, all things considered, we are seeing pockets of trouble at the household level,” Mr. Rossman said.

“If you have credit card debt, this is probably your highest-cost debt by a wide margin. My top tip is to sign up for a 0 percent balance transfer card. These allow you to move your existing debt to a new card which won’t charge interest for up to 21 months.”