Pretty much everyone knows that credit cards are an expensive form of debt. But not all cards are created equal. In fact, if you have a card with a big bank — as many people do — you could be paying a lot more interest than you have to.
In fact, a recent study suggests you might be wasting as much as $500 a year. Here’s why you might be overpaying so much — and some tips on what you can do about it.
Big bank credit cards have higher interest rates
A recent study from the Consumer Financial Protection Bureau (CFPB) revealed the troubling truth about some of the most widely used credit cards in the country.
The CFPB found that small banks and credit unions generally offer much lower interest rates to cardholders than the 25 largest credit card companies in the United States. This holds true no matter what credit score tier a cardholder is in.
The CFPB data shows that close to half of the biggest credit card companies in the country offer cards that charge a maximum APR above 30%. Not only that, but cards from big banks were three times as likely to come with an annual fee, with the largest annual fees from big card companies costing as much as 70% more than the average fees charged by smaller institutions.
The higher APRs charged by big bank credit cards actually end up costing a consumer with an average balance of $5,000 as much as $400 to $500 in extra interest per year compared with the amount of interest that a smaller card company would charge. That’s a whole lot of extra interest payments coming out of your bank account.
Should you cancel your big bank credit card?
With the CFPB showing that big banks tend to charge much higher interest rates, there’s a solid argument to be made that switching to a card issued by a smaller regional bank or credit union is the right move.
However, you also need to remember that you only pay interest if you carry a credit card balance. If you pay off your balance in full every month before the grace period ends, you’ll never owe interest anyway so it doesn’t really matter what your card’s APR is.
But for millions of Americans, paying off a card balance in full every month isn’t possible. While this is something you can and should work toward because credit card debt is always going to be costly, you also have to be realistic about your financial capacity right now.
If you currently carry a balance and think you probably will in the future, you should look for a card with the lowest APR available. That way, if you end up not being able to fully pay your card each month, you are hurt as little as possible. There’s no reason to throw away as much as $500 a year simply because you opted for a card from a big bank instead of a small regional one that charges you less.
You can check with local banks and credit unions in your area to see which ones have cards with low APRs. It’s worth making this effort, since the CFPB has made it clear that cards from big companies could be costing you a fortune.
