What is Credit Card? Why Are Credit Card Interest Rates Higher Than Bank Loans?

For those with close affinity with the bank and yet do not understand the response to give to questions like: what is credit card? and why are credit card interest rates higher than bank loans?, etc., this article will be exposing you to the full details you deserve to have about credit cards and other whatchamacallits.

According to Wikipedia whose professional term of a credit card is payment card, credit card is defined as:

It is usually issued by a bank, allowing its users to purchase goods or services or withdraw cash on credit. The use of this payment card accrues debt that has to be repaid later. Credit cards are one of the most widely used forms of payment across the world.


In a constantly advancing world of innovation and creativity which are necessary to meeting the demands of human needs, there is no way that there won’t be the proliferation of cards especially in the banking sector. Apart from a credit card, there are other kinds of cards which help in facilitating transaction convenience between or among customers of various financial institutions.

Conquest over argument, analysis reports that “a credit card is obviously different from a charge card, which requires the balance to be repaid in full each month or at the end of each statement cycle. In contrast, credit cards allow the consumers to build a continuing balance of debt, subject to interest being charged.”

A credit card differs from a charge card also in that a credit card typically involves a third-party entity that pays the seller and is reimbursed by the buyer, whereas a charge card simply defers payment by the buyer until a later date. A credit card also differs from a debit card, which can be used like currency by the owner of the card.

Why Are Credit Card Interest Rates Higher Than Bank Loans?

Credit cards typically charge a higher annual percentage rate (APR) vs. other forms of consumer loans. Interest charges on any unpaid balances charged to the card are typically imposed approximately one month after a purchase is made.

The periodic interest rate that the issuer applies to your outstanding credit card balance to arrive at your finance charge for a billing period is essentially your APR for that period.

So, the question is why are the interest rates on credit card always higher than the interest rates on normal bank loans?

  • Higher Consumer Protection

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) provided more consumer protection. This means card issuers face more risks, and that is also reflected in their interest rates.

For instance, among other protections, they have to give consumers advance notice of any upcoming increase in interest rates (interest rate changes issuers make that don’t result from Fed actions), as well as advance notice of any other significant changes.

  • No Collateral

Credit card debt is unsecured debt. It’s not backed by any collateral, unlike a home mortgage loan, which is backed by your house. If you take out a mortgage loan and default on it, the lender can repossess your house.

Similarly, if you take out an auto loan and don’t keep your end of the deal to make payments, the lender can take back your car. With a credit card, there is no actual collateral for a lender to repossess.

  • Delinquency Rates

The delinquency rates on credit card loans tend to be higher than the rates for all bank loans, according to data from the Federal Reserve. For instance, in the fourth quarter of 2023, while the delinquency rate on all bank loans was at 2.62 percent, the rate on credit card loans was at 3.10 percent.

How to Get a Low or Manageable Credit Card Interest Rate

While interest rates on debt incurred on your credit card can be exorbitantly pocket-rending when compared to rates on bank loans, there are things you can do to make sure you get a fair interest rate. Below are the prescribed solutions to the problem of high rates when paying back your credit card debt:

  • Use Your Home or Personal Loan

You could pay off a high-interest-rate card loan using a home-equity loan (which tends to carry a lower rate because it’s backed by your home) or a personal loan.

  • Management Skills

Managing your credit responsibly so that you have a good credit score. Those with higher credit scores pose a lower default risk to issuers, and they tend to land better interest rates.

  • Start Paying Early

Even if you have a higher interest rate and carry a balance, you can pay less interest on your credit card debt if you don’t make payments whenever you can. Since interest on most credit cards is compounded daily, any money you pay even before your payment is due will bring down the total interest payments you make.

  • Negotiate

If you have held a card for a long time, you could try to negotiate a better rate with your issuer. Considering that it wants to hold on to your business, you might be able to angle for a better rate.

  • Use the 0 Percent Intro on Your Card

If you are going to be carrying a balance for a while, you could transfer it to a top balance transfer card. Or if you have a big purchase to make, consider an intro 0 percent APR credit card.

In these cases, you should be vigilant about paying off the balance before this 0 percent introductory APR period ends so that you don’t end up in the same old place of facing a high interest rate again.

In case you make new purchases, you will not enjoy an interest-free grace period on them, since you are already carrying the transferred balance.

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