A recent report from the Consumer Financial Protection Bureau (CFPB) has revealed that big banks and financial companies charged higher interest rates for credit cards compared to smaller banks and credit unions. The report also highlighted “anti-competitive behavior” by these larger institutions, which negatively impacted customers. By switching to credit cards offered by smaller financial firms, consumers could save an average of $400 to $500 annually in interest rates.
The report found that during the first half of 2023, small banks and credit unions consistently offered lower interest rates across all credit score tiers compared to the largest 25 credit card companies. The APR or interest rates charged by these big firms were eight to 10 percentage points higher than their smaller counterparts. For individuals with an average credit card balance of $5,000, using a card from a small bank or credit union could result in significant savings.
One alarming finding of the report was that nearly half of the largest credit card issuers reported offering cards with a maximum purchase APR over 30 percent. Some of the institutions with APRs over 30 percent included 1st Financial Bank, Ally Bank, Capital One, Citibank, First Premier Bank, Synchrony Financial, TD Bank, and USAA Federal Savings Bank. This highlights the need for consumers to carefully consider their options and seek out credit cards with more favorable terms.
The CFPB suggested that the lack of competition in the credit card market likely contributes to higher rates at the largest credit card companies. The report found high levels of concentration and evidence of practices implying anti-competitive behavior in the consumer credit card market. In addition, approximately half of the bigger banks stopped sending customer payment information to credit bureaus, making it harder for consumers to find better deals.
The CFPB also discovered that large firms offered incentives to shopping comparison websites to promote more expensive products to credit card customers. These tactics limit price competition and result in higher rates for consumers carrying a balance. The organization recommended that consumers explore credit card products offered by smaller banks or local credit unions to find better rates and potentially save billions of dollars for households.
Apart from interest rates, the report also highlighted a significant 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 compared to those at small institutions. The average size of annual fees for the largest issuers was approximately 70 percent higher than at small institutions. This further emphasizes the potential cost savings for consumers who choose credit cards from smaller financial firms.
The CFPB report comes at a time when household debt is on the rise. According to data from the Federal Reserve Bank of New York, household debt reached $17.5 trillion in Q4 of 2023, with credit card balances increasing by $50 billion to $1.13 trillion. The report also noted a concerning trend of credit card delinquencies, with younger borrowers surpassing pre-pandemic levels. This indicates increased financial stress, especially among younger and lower-income households.
A Bankrate credit card survey published last month revealed that more cardholders are carrying balances month to month. This trend has seen a 40 percent increase in Americans’ credit card balances over the past two years. Interest rates have also risen as a result of the Federal Reserve’s rate hikes to combat inflation, leading to more people carrying debt for longer periods.
The report found that Generation X was most likely to carry credit card debt, followed by millennials, Gen Z, and baby boomers. Women were more likely to carry credit card debt than men. Notably, 56 percent of cardholders with household incomes less than $50,000 per annum carried credit card debt, while only 38 percent of those making $100,000 or more annually had such debts.
In light of these findings, experts recommend that individuals with credit card debt consider signing up for a 0 percent balance transfer card. These cards allow users to transfer their existing debt to a new card that does not charge interest for a specified period, typically up to 21 months. This strategy can help individuals manage their credit card debt more effectively, especially considering the high cost of credit card interest rates.
Overall, the CFPB report sheds light on the disparity in credit card interest rates between big banks and smaller financial institutions. By switching to credit cards offered by smaller banks or credit unions, consumers have the potential to save hundreds of dollars annually in interest payments. Furthermore, the report highlights the need for increased competition in the credit card market to ensure better rates and more favorable terms for consumers.
