It’s little secret that credit card rates are still high despite recent Fed rate cuts. In the fourth quarter of 2024, the average card rate did fall to 24.55% according to a CardRatings.com survey, but was still near historic highs. Moreover, rates aren’t expected to come down much during 2025.
Cardholders who pay their balances in full each month likely aren’t as concerned with interest rates, as they avoid interest and finance charges altogether. However, many cardholders do carry balances, making interest rates a significant factor for a large segment of the population. While most consumers understand that credit card interest rates are high and tied to credit scores, the specific mechanics of rate determination remain a mystery to many.
What exactly is your credit card’s interest rate margin?
While I certainly want to avoid getting too technical, it is important that you understand a few basics when it comes to the rate on your card. Fortunately, your rate is determined by only two factors:
- The prime rate, which is set by the Federal Reserve Bank and can increase or decrease based on how the economy is doing.
- Your card’s margin. Margin is defined as the percentage above the prime rate that your credit card company sets solely at their discretion.
Card expert Jason Steele explains that the difference between your card’s current rate and the prime rate is the margin. The current prime rate is 7.50%. For example, if your card’s APR is currently 20%, then you can easily figure out what your margin is by doing some simple math:
20% (your current rate) – 7.5% (the current prime rate) = 12.5% (your card’s margin)
Steele adds that nearly all card issuers offer variable interest rates with a fixed margin added on top of that. “The Fed rate hikes only affect the prime rate, the margin is everything else,” he says.
Margin is sometimes referred to as the profit that your card company makes when you don’t pay your balance in full each month. While your margin directly affects the profit made by your issuer, it’s not exactly the profit.
What is the average credit card interest rate margin?
Margins can vary widely and are based on your credit score and other factors, such as your income. According to Ruth Susswein, director of consumer protection for Consumer Action, a consumer education and advocacy organization, the “average rate (APR) margin for revolving accounts is now at 14.3 percent.”
While average card rates have fallen a bit in the past several months (partially due to prime rate cuts), unfortunately, margins haven’t followed suit. In fact, according to the Consumer Financial Protection Bureau (CFPB), margins were at an all-time high last year. Furthermore, approximately half of the increase in average annual percentage rates (APRs) over the past decade can be attributed to issuers expanding their margins.
While consumers with good credit usually enjoy a lower margin, they are certainly not immune to increases. According to PaymentsJournal:
- The increase in APR margin has affected consumers with all types of credit
- Consumers with the good credit scores (typically 720+) are incurring higher costs
- And even consumers with scores of 800+ (excellent range) witnessed a modest rate increase of 1.6% from 2015 to 2022 – without a corresponding increase in late payments
While card issuers certainly have a right to make a profit, many consumer advocates can’t justify the upward trend. Susswein, for instance, notes that “Margins remain inexplicably and unreasonably high which is only bad news for consumers — especially those who start the new year with already high credit card balances.”
Some experts put a more positive spin on things. Steele maintains that higher margins reflect more valuable rewards and benefits for cardholders as reward programs have grown in popularity over the years. He adds that “as new products with increased rewards and benefits are created, margins will likely rise.” Finally, he blames higher customer acquisition (marketing) costs due to the competitive nature of the industry.
How can you lower your credit card margin?
While credit card companies ultimately set the terms, securing a lower margin isn’t necessarily out of reach. Steele offers the following tips:
- Look for no-frill cards (no rewards and limited benefits) as these usually have the lowest rates.
- Find a card with a 0% APR intro offer on balance transfers.
- Pay down as much of your debt as soon as possible, even if it means making multiple payments each month.
- Credit unions are more likely to offer cards with lower margins since they exist to benefit their members, not to make a profit. Just make sure you meet the criteria for membership.
Similarly, consider applying for a card from a smaller bank and/or a local bank.
BONUS TIP!
If one card company markets a low fixed rate (not a variable rate like most cards have), then make sure that the offer doesn’t have a lot of extra fees and/or an annual fee. Historically, less-than-reputable card companies market low fixed-rate cards that are notorious for having high fees.
Final thoughts on interest margins
Credit card interest margins can seem mysterious, but they’re actually quite simple. Taking a few minutes to understand how they work can lead to significant savings on interest and finance charges. Therefore, be proactive and don’t settle- shop around especially if your margin is high.
On a related note, don’t count on your margin magically going down this year even if there are multiple prime rate decreases.
Steele opines that margins and the prime rate aren’t causally related. In short, he believes that even if the prime rate dropped to zero, margins would probably stay the same.
