More competition and less complexity: How the CFPB is working to lower prices in the credit card market

Consumers are faced with making complex decisions around pricing across a multitude of markets. Americans see this as they look to plan summer trips. From flights to rental cars to amusement park tickets, it can feel like there's too much fine print and too many junk fees not included in the upfront price. Some argue that a wide array of pricing options gives consumers more choice, but recent research from the CFPB suggests that complex pricing leads consumers to fare worse and pay higher prices.

In a market with complex and hard-to-evaluate prices, companies may be able to profit from hidden costs or to use pricing strategies to inhibit comparison shopping and account switching. Complicated pricing schemes have a particularly negative impact on consumers in the credit card market. The 190 million Americans using credit cards today hold over $1 trillion in outstanding credit card debt . Credit card pricing often includes a dizzying array of factors, including annual percentage rates, annual fees, rewards, sign up bonuses, and a variety of fees for late payments, cash advances, and more. CFPB’s analyses of the credit card market suggests that consumers face significant barriers to unbiased comparison shopping and to finding a low-cost option.

Dominant credit card companies don’t offer the best terms and interest rates

The top 30 credit card companies represent about 95 percent of outstanding credit card balances. The top 10 companies alone represented 83 percent. A recent CFPB analysis found that large banks offered worse terms and higher interest rates than small banks and credit unions, regardless of credit score. Nine of the largest credit card companies reported at least one product with a maximum annual percentage rate over 30 percent. Only six other companies surveyed reported products with rates that high. By comparison, smaller credit card companies tended to offer far better deals on interest rates: across all credit tiers, small companies offered rates between eight and 10 percentage points lower than larger companies.

When a small group of companies dominate the market, it can make it much harder for smaller competitors to break through to consumers, even when they offer far better prices. Holding significant market share can also make it easier for large companies to afford eye-catching marketing schemes, like celebrity endorsements, sign-up bonuses, and online ad campaigns. Large credit card companies’ marketing tactics can not only make it hard for smaller companies to get noticed, they also complicate the factors consumers consider, obscuring important features like interest rates or fees.

Credit cards with rewards can prove costly for many consumers

Highlighting a rewards program is a common marketing tactic among large credit card companies, adding another layer of complexity to the cost and benefits of credit card options for many consumers. Credit card rewards offer the promise of making money while you spend money, typically providing “points” based on spending volume that allow consumers to get cash back or purchase items and services at partner merchants with accumulated points value. Redeeming those rewards may itself be a complicated and confusing process, with restrictions, expiration dates, and varying point values depending on how they are redeemed.

The CFPB is conducting more holistic analyses of the risks created by credit card rewards programs, but even our preliminary reviews cast doubt on the value of rewards for some consumers. Last year, the CFPB reported that consumers who carry debt from month to month rather than paying it off earn just 27 percent of rewards at major credit card companies, while paying 94 percent of the interest and fees that those companies charged. For consumers with these revolving balances, their cards’ APR and fee schedule may be more relevant than cash-back promotions or sign-up bonuses.

Increased interest rates have driven credit card companies’ profits

Over the past decade, credit card companies have been able to quietly and steadily raise interest rates, relying on this increase to drive profits despite relatively stable lending risks. The difference between the annual percentage rate and the prime rate has reached an all-time high, accounting for about 4.3 percentage points of additional interest rates across that period.

These rate margin increases have occurred despite lower charge-off rates and a relatively stable share of cardholders with subprime credit scores, therefore driving returns that are significantly higher than other bank activities.

This excess margin has huge effects: in 2023 major card issuers charged consumers about $25 billion in additional interest because of that higher APR margin, a sizeable portion of the $105 billion in interest that consumers paid overall.

Many consumers are paying more in interest and fees than toward the principal and were charged about $130 billion in interest and fees in 2022. Of that total, about $105 billion was owed in interest and represents the primary cost of credit cards to consumers.

Manipulated comparison tools can obscure low-cost options

Though there are smaller banks or credit unions that offer lower interest rates or annual fees, consumers continue to turn to the major issuers. One reason for this is that many consumers use online comparison-shopping tools to make decisions about the card that is right for them.

At their best, these tools can help consumers navigate some of the complex pricing structures and the plethora of credit card options, but at their worst, consumers may be steered towards a manipulated list of results or digital dark patterns that are a consequence of hidden incentive payments from the credit card companies. The CFPB is working to ensure that digital advertisements for financial products are not disguised as unbiased and objective advice for consumers.

The CFPB has raised concerns that as the credit card industry has become more concentrated in the past several years, making it easier for the remaining companies to hike rates and fees. The CFPB will continue to encourage more clarity and competition in the credit card marketplace, and to monitor the amount of fees and interest charged across the industry, among other changes.