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If you have a credit card, you probably already know that you have to pay interest on what you’ve charged if you don’t pay your balance in full by the end of the grace period. The average credit card interest rate was 21.51% as of May 2024, so you’ll likely be paying a good amount of interest.
What you may not know, though, is that there’s a lot of variation in the amount credit card companies charge their customers. In fact, there’s a very good chance your card issuer is charging you much more than another card company would, and you may be wasting as much as $500 per year on extra interest charges.
Here’s why that’s the case — and what you can do about it.
If you have a card from a big bank, you’re probably paying too much interest
According to recent research from the Consumer Financial Protection Bureau, the 25 largest credit card companies offer credit cards with much higher APRs than cards from small banks and credit unions. This is true for people of all credit score tiers.
These large card issuers charge so much more interest that a consumer with an average balance of $5,000 ends up paying an extra $400 to $500 per year in interest by using a big bank credit card compared with the amount they would have paid if they had a card from a small issuer instead.
The CFPB warned that close to half of all of the largest credit card issuers offered credit cards that had a maximum APR on purchases that topped 30%. Further, large issuers were three times as likely as smaller institutions to charge annual fees, with the average size of those annual fees coming in 70% higher than the fees small issuers charge for their cards.
Should you switch credit cards?
An extra $400 to $500 per year is a lot of money coming out of your bank account and going to creditors. If you’re carrying a balance on your card, or if you’re likely to do so in the future, switching to a smaller credit card issuer with a cheaper credit card could absolutely be the right move. You don’t want to throw away $500 when there’s cheaper options available to you.
However, if you don’t carry a balance, then you may not want to rush into switching to a card from a smaller issuer even if it has a lower APR than your current card. The large card companies may offer more rewards and better perks. If you aren’t paying interest, taking advantage of these cardholder benefits just makes good sense.
This can be true even if you’re paying an annual fee for your card, as long as the value of the rewards and other cardholder benefits outweighs the fee. If you pay a $95 annual fee, for example, but your card gives you $300 worth of benefits per year, then the fee is worth it.
Ultimately, if you plan to carry a balance, the cost of interest on a high interest card is likely to be a lot higher than any added rewards that card could offer you.
The best way to avoid paying interest charges is to avoid carrying a balance. But if that’s not realistic for your lifestyle, check out smaller banks and credit unions ASAP to see what low-rate cards they can offer you that might save you hundreds per year in interest charges.
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