This Is Why Credit Card Interest Rates Are So High

What It Covers

Wharton professor Itamar Drexler explains why credit card interest rates average 23%, revealing that defaults, risk premiums, and massive marketing expenses—not just credit risk—drive rates far above other consumer lending products.

Key Questions Answered

• •Default rates versus spreads: Credit card charge-offs average 5.75% of balances for revolvers, accounting for only a fraction of the 18% spread over benchmark rates. This leaves substantial unexplained margin that cannot be attributed solely to credit risk or expected losses.
• •Marketing costs drive rates: Credit card issuers spend enormous amounts on customer acquisition—American Express exceeds $6 billion annually, surpassing Nike and Coca-Cola. These operating expenses add approximately 5% to rates, meaning consumers effectively pay for the advertising that attracted them to sign up.
• •Consumer rate insensitivity: Borrowers demonstrate minimal sensitivity to interest rate differences. Credit unions offer significantly cheaper cards, but lack marketing reach. Personal lines of credit from the same issuers charge substantially lower rates for identical FICO scores, yet remain underutilized due to limited consumer awareness.
• •Risk premium concentration: Lower FICO score borrowers pay risk premiums up to 9% versus 5% average, compensating for potential defaults during economic downturns. Even non-defaulting low-credit borrowers subsidize others through these elevated premiums, creating hidden costs for financially precarious but reliable payers.