Credit cards are a convenient form of credit. However, they come with interest rates that are probably higher than your home or auto loan. If you carry a balance on your credit card, these high-interest rates can quickly add up, making debt repayment difficult.

So why are credit card interest rates surprisingly high? While your credit score is one factor that can affect your interest rate, other reasons could also be at play. Here are some of the possible reasons.

1. Credit card companies make money off of interest payments

The primary way that credit card companies make money is through the interest that consumers pay on their balances. When you carry a balance and make only the minimum monthly payment, most payments go towards paying interest rather than reducing your debt. This allows the credit card company to make a profit off of you.

2. Credit cards are a high-risk investment for banks

Banks view credit cards as a high-risk investment. Consumers can default on their credit card debt often. In addition, when consumers make the minimum payment, it takes longer for the bank to get its money back. Banks charge higher interest on credit cards to offset the risk than other types of loans.

3. Rewards programs are expensive for banks

Some credit card companies provide rewards programs, such as cashback or points, to entice consumers to use their credit cards. While these rewards programs can benefit consumers, they are also expensive for banks. To offset the cost of these programs, banks charge higher interest rates on credit cards.

4. Credit card interest rates are variable

APR (which is Annual Percentage Rate) is interest rate charged on credit cards. Unlike the interest rates on other types of loans, the APR on a credit card can be fixed or variable. Also, it may be different for purchases, cash advances, and balance transfers. Fluctuating interest rates make it difficult for consumers to track how much interest they are paying. In addition, credit card companies can raise interest rates at any time without warning.

Know More About the Credit Card Accountability Responsibility and Disclosure Act of 2009

The Credit Card Accountability Responsibility and Disclosure Act is the federal law regulating credit card issuers’ practices. The act was passed to counter rising complaints about unfair and deceptive credit card practices, such as unexpected interest rates and fee increases.

The act requires credit card issuers to provide clear and concise information about their terms and conditions, and it limits the ability of issuers to change those terms unilaterally. The act also prohibits certain practices deemed unfair or deceptive, such as charging hidden fees or increasing interest rates retroactively.

Nevertheless, there are a few exceptions. For example, your credit card issuer can raise your interest rate if you are more than 60 days late on a payment. Also, if you have a variable-rate card, your interest rate can go up if there is an increase in the prime rate.

Reliant Management Solutions

For more information about credit card interest rate or a debt consolidation plan, contact Reliant Management Solutions in Orlando, Florida.