Credit cards are pretty integral to daily life. Three in four U.S. adults have at least one, and we use them for 70% of our retail spending, according to a recent analysis by New York Federal Reserve economists.

They’re also one of the most common ways to borrow money, with 60% of accounts showing a balance being carried from month to month, the analysis indicates.

But that can be an expensive proposition. Credit cards carry pretty steep interest rates compared to other types of loans: They average over 22%, as of the latest Fed data available, and can easily top 30%.

Plus, in contrast to most personal or auto loans, the interest on credit cards compounds — meaning you’re charged interest on your interest. You can get behind more quickly and end up feeling like you’re stuck on a credit treadmill.

So why are credit card rates so high, relatively speaking? Let’s look at how credit card issuers set their rates — and what you can do to keep your costs down.

How Credit Card Interest Rates Are Built

There are three layers to the variable interest rate, or annual percentage rate (APR,) that is offered to you on a credit card.

•  The rate you’re charged starts with the federal funds rate, a benchmark rate set by the Federal Reserve and dependent on economic conditions. Right now the upper target for the fed funds rate is 4.50%, but it was nearly zero during much of the pandemic and double-digits during the early ‘80s, when inflation was sky high.

•  Credit card issuers then tack on a set amount — almost always 3 percentage points — to the fed funds rate. This creates what’s known as their prime rate for consumers.

•  Issuers then add an interest rate margin to the prime rate. They decide this margin, which can vary from cardholder to cardholder. People who are considered a good credit risk are generally offered a lower interest rate margin than those who aren’t. (More on this in a moment.)

Why Credit Card Rates Are High Now

What does all this tell us?

First, credit card rates usually move in lockstep with the fed funds rate, which is still over 4 percentage points higher than it was in early 2022.

Second, card issuers have a lot of control over rates. Between 2013 and 2023, the average U.S. credit card rate spiked from 12.9% to 22.8%, in part because the average interest rate margin climbed from 9.6% to 14.3%, according to a 2024 analysis from the Consumer Financial Protection Bureau (CFPB).

To be fair, there’s a lot of debate about why the average rate margin has risen. Issuers have attributed it to an increase in their risks (i.e. more borrowers with subprime credit scores) while some consumer advocates suggest it’s more about generating profits.

The NY Fed’s analysis found that the two most significant reasons for high rates are the large marketing expenses associated with the credit card business and the risk of a major economic downturn causing widespread defaults. (Keep in mind that unlike with a mortgage or an auto loan, there’s no collateral with credit cards.)

How Your Credit Score Factors Into Rates

All that said, your own credit score can still be a powerful lever when it comes to credit card rates.

Let’s say the fine print of an offer says “We add 8.74% to 19.74% to the Prime Rate to determine the Purchase APR.” This means applicants who are seen as the most creditworthy are likely to get the 8.74% margin, while those seen as the least creditworthy could get the 19.74% margin. (To see what kind of difference this can make to your finance charges, use this SoFi calculator.)

Ways to Combat High Credit Card Costs

It won’t matter what today’s credit card rates are if you’re not carrying a balance. If at all possible, pay your balance in full each month. It’s not only the easiest way to avoid a cycle of debt, but it can reduce your financial stress and potentially free up money for important financial goals.

If paying in full isn’t possible, here are some other ways to keep your credit card costs down:

•  Build a strong credit score: As we’ve just said, credit card issuers tend to charge lower rates if you have a higher credit score, so it can literally pay to work on your score. Making your credit card and other loan payments on time, every time, is the biggest factor in building good credit.

•  Avoid late payments: Beyond the credit score implications, some issuers will charge you a higher penalty APR if you’ve been late or missed a payment. Set up automatic payments to avoid mishaps.

•  Consider a debt consolidation loan: If you’ve already got credit card debt, moving it from a credit card to a personal loan could significantly lower your interest rate. (Check out SoFi’s rates here.) Just be careful not to run up a balance again.

•  Work on building up an emergency fund: You don’t want a surprise to derail your finances. If your pet gets sick or your car dies, having a buffer of savings to draw from can help you avoid incurring credit card debt.

•  Don’t pay to use your card: While there are some credit card rewards and perks worth paying for, it’s often best to choose credit cards you can use for free. That means cards that don’t charge an annual fee or foreign transaction fees when you go abroad.

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