Interest rates on some retail credit cards climb to record 33%. Can they even do that?

Some store credit cards now charge more than 33% interest, after blowing past a symbolic 30% threshold that retailers and banks dared not cross.

Can they even do that?

The short answer: yes.

“Yep. They can charge that much,” said Chi Chi Wu, a senior attorney at the nonprofit National Consumer Law Center. “Credit cards can actually charge whatever they want. It’s a little-known fact.”

Interest rates on credit cards have reached historic highs, largely in response to an aggressive campaign of rate hikes by the Federal Reserve in 2022 and 2023.

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The average retail credit card now charges 28.93% interest, a record high, according to Bankrate, the personal finance site.

In a recent survey of lenders, Bankrate found four retail cards that charge an eye-popping 33.24% annual interest. The retailers: Academy Sports + Outdoors, Burlington, Good Sam and Michaels.

“Rates are the highest we’ve seen now in our database,” said Ted Rossman, a senior industry analyst at Bankrate.  

The survey found 16 other retail cards that charge 32.24% interest, a list that includes the brands Ross, Wayfair and Piercing Pagoda.

Credit cards are charging record interest as the holidays approach

Credit card analysts see those rates as a red flag as the nation heads into the season of giving. Inflation-weary shoppers may be tempted to put big purchases on a new store card, unaware of the interest they will face if they carry the balance into the new year.

“I think it’s a big cautionary tale, headed into the holidays,” Rossman said.

Card rates have risen dramatically in a short span. The average rate across all commercial bank cards surged from 14.56% in February 2022 to 21.19% in August 2023, according to federal data.

Credit cards tend to carry higher interest rates than car loans or home loans. A credit card is not generally “secured” by a piece of property that the lender can claim if the borrower stops repaying the debt. Card companies take a risk by extending credit to millions of Americans with a wide range of credit scores, some of whom will default on the debt.

Store cards tend to charge more interest than other cards, partly because retail cardholders tend to earn lower income and have weaker credit.

Retailers often pitch cards to customers at the checkout counter, as other customers line up behind them, not an optimal moment for the potential cardholder to review the fine print on annual percentage rates and foreign transaction fees.

“Credit card contracts are extremely complicated,” said Christopher Peterson, a law professor at the University of Utah. “Even talented lawyers would struggle to understand them when they’re at the end of the line at the mall.”

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A credit card pitch might focus on attractive lures, like a 15% discount on that day’s purchases, making the card sound like a rewards program.

“Sometimes, people don’t even realize they’re signing up for a credit card,” Rossman said. “They think they’re signing up for some kind of promotion.”

Many retail cards offer real perks, and even a 30% interest rate carries little risk for a customer who pays off the full balance at month’s end.

“That, from the consumer standpoint, is the advice,” Rossman said. “If you’re loyal to a store and you save 5% every time you use their card in their store, it could be a win.”

Carry a balance from month to month, however, and that high interest rate kicks in.

Until recently, card issuers resisted pushing past the 30% interest-rate barrier, mostly as a matter of optics.

“Generally speaking, 30% had been this sort of threshold,” said Matt Schulz, chief credit analyst at LendingTree.

“But now we’re seeing more and more cards out there that are 30% or higher. And if they’re not 30% or higher, there’s a whole other layer of them that are sitting at 29.99%, because the lenders don’t want to get up to 30.”

A credit card customer who eyes a 30% interest rate for the first time might be surprised that a lender is allowed to charge that much.

How much interest can credit card issuers charge?

Many states have usury laws that limit interest rates on various types of loans. But banks are generally allowed to charge the highest rate permitted in their home state, even to a customer who lives somewhere else.

“It matters where the bank is based, not the customer,” Rossman said.

Thus, many card issuers do business in states with relatively permissive rules on credit card rates. They include South Dakota, Utah and Delaware.

There’s no national limit on credit card interest rates, with some exceptions. Federal credit unions may not charge more than 18% interest on a card. Federal law caps rates at 36% for active service members and their families.

Some in Congress have proposed extending that 36% cap to the rest of the nation. Others have mulled even stricter limits.

Sen. Josh Hawley, the Missouri Republican, introduced legislation in September to cap credit card interest at 18%. Four years ago, Sen. Bernie Sanders of Vermont and Rep. Alexandria Ocasio-Cortez of New York, proposed to cap card rates at 15%.

Lenders and their advocates have opposed the caps, saying they might limit the ability of Americans with weaker credit to borrow.

“It would surprise me if we ever got a credit-card rate cap in this country of any significance,” said Schulz of LendingTree.

And why not?

“I think it’s the power of the banking industry lobby,” said Peterson, the Utah law professor.

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Federal regulators have focused instead on restricting lenders from charging excessive fees and abruptly raising rates. In 2009, Congress passed legislation that required card companies to alert customers to interest rate hikes, while also limiting fees to customers who paid late or charged past their credit limit, among other reforms.  

Congress limited card fees but did not eliminate them. Lenders still charge a wide range of fees: Annual fees, late fees, cash advance fees, over-limit fees and card-replacement fees, among others. They can sneak up on you.

“When issuers raise the interest rate, at least you can see it’s an expensive credit card,” said Wu of the National Consumer Law Center. “When they put it in the fees, you can’t see it.”