MW Why are credit-card interest rates so high? Here's something banks won't advertise.

By Jeffry Bartash

Credit cards are a risky business, and TV ads aren't cheap

What's in your wallet? A credit card with interest rates that are far higher than any other major kind of loan.

Why do credit cards have such high rates? The New York Federal Reserve looked into the matter and came up with two chief reasons.

Card issuers, obviously enough, charge high rates to offset the risk of customers defaulting, or failing to pay for their purchases. More than half of all default losses suffered by banks each year are tied to credit cards.

Yet the interest rates on credit cards are set at levels above what it would take to compensate banks for their losses, the Fed found. That suggests banks are setting rates based on worst-case risk scenarios, such as a recession.

A second factor? The banks with the most credit-card users spend huge amounts of money to market their cards on television, in print and online.

Banks that offer credit cards spend 10 times as much money on marketing and advertising compared with other bank lenders.

The biggest card advertisers are Capital One $(COF)$ and American Express $(AXP)$, the study showed. American Express spent an estimated $5.2 billion in 2023 and Capital One spent $4 billion.

Many of these TV ads feature celebrities - among them Samuel L. Jackson - or popular songs.

"The largest credit card banks rank among the world's top marketers, with budgets comparable to consumer giants like Nike $(NKE)$ and Coca-Cola $(KO)$," the authors of the study wrote.

These banks also earn greater profits from credit cards, and they do so in part by charging higher interest rates on both risky borrowers and higher-income customers who rarely if ever default.

The most surprising result of the study was that credit-card rewards such as bonus points, airline miles and cash rewards probably aren't a factor in the high rates.

These rewards cost the six largest credit-card companies "a staggering $67.9 billion" in 2023, the New York Fed said. Yet the fees collected by banks from store merchants more than offset the cost of the rewards, the Fed calculated.

Despite high rates, credit cards have become integral to the U.S. economy. Three-quarters of all American adults have at least one. There were 580 million credit-card accounts in the U.S. in 2023, the Fed said.

Credit cards were used to buy $6 trillion in goods and services in 2023, accounting for 70% of all U.S. retail sales.

Both Democratic and Republican lawmakers have proposed capping interest rates on credit cards, but passage of such a law does not appear imminent.

-Jeffry Bartash

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 31, 2025 13:29 ET (17:29 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.