Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315946 
Year of Publication: 
2025
Series/Report no.: 
Staff Reports No. 1143
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Credit card interest rates, the marginal cost of consumption for nearly half of households, currently average 23 percent, far exceeding the rates on any other major type of loan or bond. Why are these rates so high? To understand this, and the economics of credit card banking more generally, we analyze regulatory account-level data on 330 million monthly accounts, representing 90 percent of the US credit card market. Default rates are relatively high at around 5 percent, but explain only a fraction of cards' rates. Non-interest expenses and rewards payments are more than offset by interchange and non-interest income. Operating expenses, such as marketing, are very large, and are used to generate pricing power. Deducting them, we find that credit card lending still earns a 6.8 percent return on assets (ROA), more than four times the banking sector's ROA. Using the cross section of accounts by FICO score, we estimate that credit card rates price in a 5.3 percent default risk premium, which we show is comparable to the one in high-yield bonds. Adjusting for this, we estimate that card lending still earns a 1.17 percent to 1.44 percent "alpha" relative to the overall banking sector.
Subjects: 
credit cards
banking
asset pricing
household finance
JEL: 
G12
G21
G51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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