Want a better credit card interest rate? Try smaller banks or credit unions

Your credit card’s annual percentage rate (APR) dictates how much interest you’re charged on your credit card bill when you carry a balance instead of paying it off immediately. The higher your interest rate, the more you pay — and the longer it can take to get out of debt.

Half of American cardholders (50 percent) are carrying a balance from month to month, according to Bankrate’s 2024 Credit Card Debt Survey. With average credit card interest rates at  20.55 percent as of October 2024, those cardholders are likely paying quite a bit in interest each month — especially if their card is issued by a large bank as opposed to a smaller bank or credit union. according to a February 2024 report from the Consumer Financial Protection Bureau (CFPB).

If you’re looking to get a credit card with a good interest rate, why not try a local bank or a credit union? We outline why you’ll find higher fees and interest rates at a large bank and why a credit union or smaller bank could net you a better deal.

Large banks charge higher interest rates and fees, irrespective of credit score

The February 2024 report from the CFPB is based on a survey that the agency conducts periodically about card issuers and the terms of their credit card plans. The data gathered in 2023  — which included 156 issuers — includes input on all general-purpose credit cards from the 25 largest card issuers, as well as a sampling of cards from smaller banks and credit unions.

Interest rate data

The 25 largest credit card issuers charged interest rates that were 8 to 10 percentage points higher than those offered by smaller banks and credit unions, according to this February 2024 report from the CFPB.For the average cardholder carrying a balance on a card from a large issuer, this difference translates to around $400 to $500 more in annual interest payments. Moreover, this pattern of large banks charging higher interest rates is true regardless of whether a cardholder had a poor, good or excellent credit score.

Some cards from the largest issuers even had interest rates higher than 30 percent, particularly when it came to co-branded credit cards and store cards. In fact, the average retail credit card interest rate hit an all-time high in 2024 at 30.45 percent, according to Bankrate’s 2024 Retail Credit Card Survey.

While there is generally no cap on credit card interest rates, credit union card rates are capped at 18 percent, per the Federal Credit Union Act.

Annual fee data

Large issuers also were more likely to charge annual fees, with 27 percent of their card offerings charging this fee, compared to 9.5 percent for smaller issuers. And the average annual fee charged by the largest issuers was $157, compared to $94 for the smaller issuers.

Why do credit unions have better interest rates?

One factor the CFPB points to as behind high card interest rates is the big mark-up that card issuers charge over the prime rate. This is true even as the risk of consumers’ defaulting on their credit cards has gone down in the years following the Great Recession (during which issuers priced in the high risk of defaults to charge higher rates). According to Adam Rust, director of financial services at Consumer Federation of America (CFA), a consumer advocacy group, the high interest rates that large banks charge are driven by the aim of “recouping the cost of customer acquisition,” which drives up their marketing outlays. These banks constantly send out card offers to consumers and also tend to advertise on large digital comparison shopping sites more than smaller banks and credit unions.Amanda N. Jackson, director of consumer campaigns for Americans for Financial Reform (AFR), a nonprofit coalition, pointed to a lack of competition driving higher interest rates. She noted, “When banks can enjoy high-profit margins that are not competed away in the name of serving customers, a market lacks effective competition. That is the key problem with credit cards.”

In the news: Is there a lack of competition in the credit card market?

The CFPB, too, sees a lack of competition in the credit card marketplace as being behind this pattern of bigger issuers charging higher interest rates. The top 30 credit card issuers account for around 95 percent of credit card debt, according to 2023 data from the CFPB, and this lack of market competition seems to give these big banks more pricing power.However, the banking industry begs to differ. According to Sarah Grano, vice president of public relations for the banking industry trade group the American Bankers Association (ABA), the CFPB is disregarding facts.

Echoing this view, the Consumer Bankers Association (CBA), another banking industry trade group, noted in a media release that there are more than 640 credit card products and about 4,000 banks in today’s “highly competitive” credit card marketplace.The CFPB declined to comment on a Bankrate inquiry about whether the proposed merger of Capital One and Discover (two large card issuers) would serve to further cut down on competition in the credit card marketplace.However, AFR’s Jackson did have some insight to share:

And CFA’s Rust noted, “The prospect of an even larger credit card issuer raises concerns. I can’t see how it can’t have a negative impact on competition [in the credit card marketplace].”

How the CFPB is looking to promote card market competition

The CFPB is taking some steps to make the credit card marketplace more competitive.

For one, the CFPB is proposing an open banking rule. This rule would promote competition since banks would have to share a customer’s financial data with other lenders if the customer asked them to, making it easier for consumers to switch to a lender that offered them better terms.

The CFPB is also looking to make it easier for consumers to comparison shop for the best credit card interest rates. Banks tend to compete on the basis of rewards, sign-up bonuses and introductory rates, and consumers tend to be lured by these offerings without adequately weighing high interest rates.

However, Jackson doesn’t see facilitating comparison shopping as making up for efforts to effectively regulate credit cards. “There are too many abusive practices that are too widespread in this business to expect that comparison shopping will solve the problem,” she said.

How to get a better credit card rate

Although efforts are underway to increase competition and lower credit card interest rates, how can you, as a consumer, get a lower interest rate in the meantime? If you already have a credit card and want to lower your rate, consider reaching out to your issuer and asking. Sometimes a representative can lower your APR, even temporarily, to maintain a good relationship with you as a consumer.

If you’re shopping for a new card, consider the following tips:

• Take into account the interest rate, rather than focusing on rewards, sign-up bonuses and other incentives. If you plan to carry a balance, the interest payments you make will easily outpace the value of the rewards you earn.
• Look at what issuers charge for all of their rates, not just purchase APR. Cards tend to offer different interest rates on purchases, balance transfers and cash advances. Issuers often even have a penalty APR that kicks in if you miss a payment, so be sure to compare all of a card’s APRs as you shop.
• Take advantage of introductory APR offers, but with caution. If a card offers a 0 percent introductory APR, make sure you understand what your interest rate will be once the promotion ends.
• Pay attention to the entire APR range an issuer is offering, not just the low end. Issuers sometimes advertise an interest rate range for a card, rather than a specific rate, and you’ll only know your exact interest rate once you are approved for a card. Make sure that you’ll be fine with a rate on the higher end of the range before you apply.

Finally, don’t forget to check out your local credit union.

The bottom line

Based on a survey of the terms of finance of various card issuers’ credit card plans, the CFPB finds that larger banks tend to charge higher interest rates than smaller banks, regardless of consumers’ credit scores. One factor the CFPB points to as contributing to this trend is a lack of competition in the credit card marketplace — a situation that the CFPB is looking to address.To get better interest rates while shopping for a new credit card, consumers should weigh a card’s interest rate against any rewards and incentives it offers, as carrying a balance with a high interest rate will eat into any rewards they earn. You should also take into account different interest rates on various balances, such as purchases and cash advances. Ultimately, your best recourse for a low-interest card might be to turn to a smaller bank or credit union.