The largest credit card companies in the nation typically impose higher interest rates compared to smaller banks and credit unions, potentially leading to significant savings for the average cardholder, as indicated by an analysis released by the Consumer Financial Protection Bureau on Friday.
However, experts suggest that depending on the specific card and usage patterns, some consumers might derive greater financial benefits by sticking with larger lenders.
During the first half of 2023, the largest U.S. lenders maintained a typical credit card annual percentage rate that stood 8 to 10 percentage points higher than their smaller counterparts, as highlighted by the financial watchdog.
The rise in rates for consumer debt and savings products correlates with the U.S. Federal Reserve’s incremental increase in its benchmark interest rate. Although the CFPB analysis encompasses all but the most recent hike, which occurred with a quarter-point increase in July.
According to the CFPB analysis, consumers carrying a $5,000 balance could potentially save $400 to $500 annually by opting for cards from smaller lenders over larger ones, underscoring the significant stakes involved for cardholders.
TransUnion data suggests that the average individual maintains a balance of $6,360.
“We’re finding many of them would be better off with newer entrants or smaller players in the market,” remarked CFPB Director Rohit Chopra during an appearance on CNBC’s “Squawk Box” on Friday. “For the average household… switching can actually save them hundreds and hundreds of dollars over the course of the year.”
The agency’s findings emerge against the backdrop of record-high average credit card balances and total credit card debt as of the end of 2023.
Federal Reserve data indicates that the average credit card interest rate for all accountholders exceeded 21% in November, marking a new record.
The CFPB’s analysis categorizes large lenders as the nation’s top 25 and small lenders as all others within its sample. It draws upon data from 643 general-purpose credit cards offered across 156 issuers in total, including 84 banks and 72 credit unions.
Notably, the vast majority of the credit card market is dominated by large lenders, with the top 10 holding an 83% market share and the top 30 collectively accounting for approximately 95%, according to another recent CFPB report.
In response to the report, spokespeople from the Consumer Bankers Association and American Bankers Association emphasized the highly competitive nature of the credit card market, offering consumers a diverse array of card options with varying features and pricing.
“The credit card market is highly competitive and gives consumers a broad range of cards from which to choose,” remarked Lindsey Johnson, CEO of the Consumer Bankers Association.
The CFPB’s new interest-rate findings remain consistent irrespective of a consumer’s credit score. For instance, individuals categorized with “poor” credit (a score of 619 or less) faced a median average percentage rate of 20.62% at smaller institutions compared to 28.49% at larger ones.
Ted Rossman, an industry analyst at CreditCards.com, pointed out that while interest rates are a crucial consideration for consumers carrying a balance, they may not matter for those who pay their bills in full each month.
Rossman highlighted that large lenders often offer more robust rewards programs, albeit with higher annual fees on average, potentially offsetting costs for users who responsibly leverage these benefits.
Additionally, while small issuers typically maintain lower ongoing APRs, large lenders may provide promotions such as temporary 0% interest on balance transfers, which could aid users in paying off high-interest card debt.
Nevertheless, Rossman cautioned that individuals carrying a balance might be best served by avoiding credit card usage altogether and focusing on paying down existing balances, possibly with the guidance of a nonprofit credit counselor.
“I’d be hard-pressed to find a case where even an 8%, 10%, or 12% card makes sense for them,” Rossman concluded.
