Are Credit Card Interest Rates Keeping You in Debt?

“[Banks] own your butt, and you gave them the deed! Don’t give them the deed to your butt! They own you!” –Dave Ramsey

Credit card interest rates continue to rise, yet consumers are still spending. Why? Well there are a number of factors that contribute to Americans’ trillion dollars of credit card debt. Lower income households are struggling to stay afloat, especially after the Covid-19 pandemic. Many people continue to live and spend outside of their means. Credit card interest rates are at an all-time high. And credit card companies profit from keeping you in debt. 

This article will explore the tactics used by credit card companies to increase their profits and keep you in debt. We’ll also share ways to avoid credit card interest rates to get and stay out of credit card debt. 

As Dave Ramsey says, “You can make it without these things. Get you a debit card. Pay cash for it.” Here’s how:

How Bad Are Credit Card Interest Rates?

Basically, credit card interest rates determine how much extra you’ll pay if you carry a balance on your card from month to month. And, according to Bankrate, that’s the case for about 1 in 2 credit card holders. 

The Federal Reserve’s string of interest rate hikes lifted the average credit card rate to an all-time high of more than 20%. Credit card fees increased despite Joe Biden’s move to cap credit card late fees in March 2024. The financial industry responded by filing multiple lawsuits against the administration. 

Increasing credit card interest rates, in addition to steadily high inflation and the cumulative increase in prices over the last three years, leaves many households in a bind, says Greg McBride, chief financial analyst at Bankrate.com.

Credit cards have become one of the most expensive ways to borrow money. So why do people still use them? Well, aside from struggling to afford emergency and unplanned expenses, credit card companies intentionally mislead and manipulate borrowers. More on that next.

Why Americans Continue to Use Credit Cards

People continue to use credit cards. They offer convenience, financial flexibility, and various benefits that other payment methods often lack.

Credit cards are easy to use for both in-person and online purchases. They reduce the need to carry large amounts of cash. And automatic billing for subscriptions and recurring expenses simplifies payments.

There are also often a number of perks associated with using a credit card. Many credit cards offer cashback, travel points, or rewards for specific spending categories. Some provide perks like airport lounge access, travel insurance, or extended warranties. 

But Bankrate reported that the most common reasons for credit card debt include emergency and day-to-day expenses. Among respondents surveyed who carry a balance on their credit card(s), 47% say the primary cause was an emergency/unexpected expense(s): 15% named emergency/unexpected medical bills; 9% emergency/unexpected car repairs; 7% emergency/unexpected home repairs; and 16% other emergency/unexpected expenses. Twenty-eight percent cited day-to-day expenses such as groceries, childcare, and utilities as the primary cause.

Yes, credit card use can help build a positive credit history. Credit history is often crucial for securing loans, mortgages, and even some jobs. And paying on time and keeping balances low can improve your credit score. But this is only the case if credit cards are used responsibly and borrowers can avoid or minimize credit card interest rates. And, unfortunately, credit card companies actively work to prevent this. 

Why Credit Card Companies Want to Keep You in Debt

The bottom line is that credit card companies make money from credit card interest rates and other “junk fees”. Junk fees are extra charges that businesses add to the cost of a product or service. They often come with little explanation or transparency. These fees might include service fees, convenience fees, processing fees, late fees, etc. 

So the more products you purchase, the more credit card debt you accrue, and the harder it becomes for you to pay it off or get on top of it, the more money credit card companies make. 

Elena Botella, before resigning from her position with Capital One, questioned how raising credit card interest rates “radically” improves people’s lives. And this, she says, was one of the company’s “pie in the sky” goals. At the end of the day, it was just another way for the company to make more revenue. 

According to Bilal Beydoun, Director of Policy and Research for Groundwork Collaborative, credit card companies profit from predatory pricing. He defines this as “algorithmic-driven pricing,” or what you might have heard called “dynamic pricing”. Many companies were able to exploit the economic emergency created by the pandemic by raising their prices, contributing to inflation. So when you purchase a product at an inflated price and carry a balance at, say, 35% APR, you become a victim of what Beydoun refers to as “corporate profiteering.” The already inflated purchases you are charging follow you the rest of the year and cost you more and more every month.

Isn’t Credit Card Debt a Choice?

Most people believe that people who take out loans or open credit cards make that choice and should therefore be responsible for it. But Botella argues that most people wouldn’t make that choice if they had all of the information that credit card companies have. After leaving Capital One, Botella travelled the country looking for stories about the experiences of people living with debt and how they had been affected by the choices credit card companies like Capital One were making.

At one point in her career with Capital One, Botella was on a team where she was tasked with conducting experiments to see how much money the company could extract from people. “The bank is doing those experiments to measure, like, how much debt can I get somebody in, up until the point that they’re going to be in so much debt that they default because of that extra debt burden?” she explains. 

Botella believes that credit card companies are taking advantage of the fact that most people don’t understand the whole picture. “The two parties are operating with just completely different sets of information,” Botella says. “So they have a specific estimate: this person is going to get into $13,000 of debt. And over the next five years, they’re going to pay $8,000 worth of interest, whatever the case may be. They know that and you don’t and would you make the same decision if they just told you that?”

And raising credit card interest rates isn’t the only strategy credit card companies use to keep consumers in debt. Remember those perks we listed earlier? Just how much are you rewarded for the thousands of dollars the credit card company makes off of you? 

Understanding Credit Card Company Tactics

Capital One in particular has been penalized for practices like targeting people with low credit scores, tricking them into buying add-on services like credit and payment monitoring they didn’t actually need, and leading them to mistakenly believe that those things would improve their credit. But you have to understand that credit card companies are for-profit businesses. They will aim to increase their profits every year.  

“No one should be surprised that credit card debt hit another record high,” says Matt Schulz, chief credit analyst at LendingTree. And “there’s very little reason to believe that we won’t continue to see new credit card debt records being set going forward.”

Junk Fees

Rohit Chopra, former Commissioner of the United States Federal Trade Commission, has made big strides as Director of the Consumer Financial Protection Bureau (CFPB). He’s been particularly concerned with regulating excessive fees levied on people by credit card companies and banks. “We put out a rule…regarding credit card junk fees. And so what we found was that there was a loophole that the credit card companies had been abusing for years and years and years to extract an extra $27 million a day, $10 billion a year,” Chopra says.

Credit card junk fees might include anything like annual fees, balance transfer fees, late payment fees, foreign transaction fees, etc. Although, a staggering majority of credit card company profits comes from credit card interest rates ($105 billion out of $130 billion in 2022) rather than from junk fees.

Devaluation of Points

And those points and travel perks credit card holders are so quick to tout? Chopra has plans to reform how credit card points are used, too. “Well, we were actually pretty worried about these credit card companies engaging in massive devaluation of points. They want to say you’re going to be able to use this for free round trips, and then you try and use it and it’s almost worthless. That is not right. So we are actually trying to make sure that the promises are being kept,” he says.

Unethical Practices

Credit card companies have been caught opening up authorized accounts and making serious billing errors that they failed to correct until people reached out. And, believe it or not, Citibank is one example of application discrimination. They analyzed applicants’ last names under the impression that anyone with an Armenian-sounding name would somehow be a poor applicant. “So you simply cannot leave these credit card companies to their own devices,” says Beydoun, “because that almost certainly will lead to some of these practices that we just went through.”

So what can be done?

Why Paying in Cash Avoids Credit Card Debt

To combat credit card interest rates, it’s important to make sure you stay educated about how credit cards work. Read the fine print, ask questions, remain vigilant, and do your research. And of course, avoid credit cards altogether if possible. It’s easier said than done, but remember that the higher your balance, and especially the higher the balance you carry from month to month, the more debt you accumulate in credit card interest rates.

Paying with cash or debit can minimize credit card debt by promoting more intentional spending and reducing reliance on credit.

First, it minimizes impulse spending. When you use cash, you physically see the money leaving your wallet, which can make you more mindful of your purchases. This often leads to better budgeting and less overspending.

Credit cards can create a “buy now, pay later” mentality, encouraging spending beyond your means. Using cash sets a clear limit — once it’s gone, you can’t spend more without actively seeking additional funds. This helps limit overspending.

By using cash for everyday expenses, you reduce the need to put small purchases on your credit card. This helps you focus on paying down existing credit card balances without adding to them, thereby avoiding credit card interest rates.

Paying with cash often requires planning, which naturally leads to better money management. Many people set spending limits by withdrawing a set amount of cash for the week or month. Sticking to a planned budget can help minimize the “need” for credit card spending.

By relying less on credit cards for daily expenses, you can allocate more money toward paying down your existing debt and prevent further debt accumulation. Using cash for non-essential purchases or setting a cash-only rule for categories like dining out, entertainment, or groceries can significantly reduce the risk of accumulating debt.

What Credit Card Interest Rates Mean for ATM Business Owners

We’ve said it before, and we’ll say it again: cash is still relevant. As banks, credit card companies, and other financial institutions get dangerously large, or, “too big to fail”, more people than ever are encouraged to keep cash on hand as a safeguard against financial uncertainty. 

Cash continues to present certain benefits like privacy, budgeting power, and emergency preparedness. Most importantly, it could be the best defense against credit card interest rates and suffocating credit card debt. Don’t let credit card companies own you!

Ready to get into the ATM game? Whether you’ve been skeptical about the relevance of ATM machines amid electronic payment options or want to make some extra money to help tamp down your own accumulated debt, get your free ATM start-up kit today!