Credit cards from smaller banks have lower APRs. But are they right for you?

Using a credit card issued by a small bank or credit union could cost you $400 to $500 less each year than a card from a large national bank.

That’s what emerges from a new survey conducted by the Consumer Financial Protection Bureau. Credit cards issued by small institutions such as community banks and credit unions have significantly lower annual percentage rates than those issued by larger institutions, the CFPB found.

During the first half of 2023, small banks and credit unions tended to offer cheaper interest rates than the 25 largest credit card issuers across all credit tiers. For people with a “very good” or “excellent” credit score of 720 or higher, the average purchase APR offered by large institutions was 22.99%, while the average purchase APR offered by smaller institutions small was 15.24%. For someone with a good credit score between 620 and 719, the median APR difference was 28.20% versus 18.15%.

According to a 2023 CFPB report, the average cardholder had $5,288 in debt at the end of 2022. This means that an average cardholder could save $400 to $500 per year due to the difference in APRs from small issuers versus larger ones.

This could be useful information for an average American today: The cost of credit cards has never been higher, according to the 2023 CFPB report, and credit card delinquencies are on the rise, exceeding pre- pandemic. Federal Reserve rate hikes starting in 2022 have led to higher credit card interest rates across the board. According to the CFPB, as of June 2023, a total of 15 card issuers had at least one product with a maximum APR above 30%, including nine of the country’s largest credit card companies such as Ally Bank ALLY,
City C,
and Capital One COF,

There’s no question that smaller card issuers offer lower APR rates, credit card analysts said, especially considering the fact that federal credit unions must cap their credit card rates at 18%. Many different factors go into determining a credit card’s APR, including the card’s rewards program and the customer’s credit score, experts told MarketWatch. But when choosing a credit card, APR isn’t the only consideration, even though it’s more expensive than ever to use a credit card.

While smaller issuers have lower APRs, they may not have as lucrative rewards programs and are also less likely to offer such a long promotion period with 0% interest, said Matt Schulz, chief credit analyst at LendingTree. Balance transfers using the 0% promotion period can be a way for people with good credit scores to pay off their debt as soon as possible.

Compared to larger issuers that offer a broad range of card products aimed at a broader group, smaller banks typically offer fewer products and serve a much more local audience, experts said.

“The right credit card is the one that fits your spending and gets you toward the goal you’re working toward,” Schulz told MarketWatch. “It’s really important to focus on your goals because the fees are so high and the cost of not shopping around and not having the right card is significant.”

The bottom line is to minimize debt on a credit card and not carry a balance month to month, and if you have debt, try to pay it off as quickly as possible, said Ted Rossman, senior industry analyst at Bankrate.

Even the lowest APR isn’t that low anymore, and maintaining what is now a relatively low 12% rate for many months or years could be expensive, Rossman said. “Yes, 10% is better than 20% or 30%, but it’s just better than all that is zero,” he added.

Those with lower credit scores, instead of opening another card with a lower APR, could also turn to credit counseling services, Rossman added. With a low rate, nonprofit credit counseling organizations could help negotiate a lower rate for up to four or five years, she said.

The investigation was part of the CFPB’s efforts to promote competition and transparency in the credit card market. The credit card market is concentrated, with the top 10 card issuers covering more than 80% of consumer credit card loans, which has led to higher prices, the CFPB said in the survey. Credit card issuers have disputed the CFPB’s characterization of the industry as free of competition.

The report finds that larger institutions are also more likely to charge higher annual fees than their smaller counterparts, with 27% of cards from large issuers charging an annual fee compared to 9.5% of smaller companies. On average, annual fees at large institutions were $157 compared to $94 at smaller issuers.

Ally Bank and Capital One did not immediately respond to requests for comment. Citi did not respond to a request for comment. A spokesperson for the American Bankers Association told MarketWatch in an email that the CFPB report was politically motivated.

“CFPB data shows that interest rates are set in a highly competitive credit card market, which offers consumers a wide range of options to find the card that best meets their needs,” said Sarah Grano, spokeswoman of the ABA. For example, some consumers may want a card with a lower fee while others may prioritize rewards programs or other card features that are important to them. Americans need only look at their mail and inbox to learn about the many credit card choices available to them.”

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