Although the interest rate that is charged by a credit card varies considerably between credit cards, they do tend to be seen as one of the higher interest borrowing options available to an ordinary borrower. There are a number of reasons for this.
One of the reasons that credit cards charge a high amount of interest is ironically that for a time they do not charge any interest at all. Whereas an ordinary loan will charge interest from the first day, a credit card will not charge it for a period of up to around sixty days. This is called the grace period and is the period between purchasing the good and receiving the statement and then between receiving the statement and a reasonable time for the statement to be paid in full. This means that if a person pays off their statement in full every month then they will not be paying any interest, even if they constantly spend thousands of dollars every month. In effect this money is interest free.
Another reason that credit cards charge so much interest is that credit cards tend to be unsecured. This means that if the credit card holder defaults on debt then they will have to be pursued through the courts rather than losing a large asset such as a house or car. This has two effects. In the event of a default the recovery is quite low compared to secured loans. There is also the fact that borrowers are less likely to prioritise loans in the same way they do a home loan or a car loan, as they do not treat it in the same way as renting a home. This will make defaults more likely.
In fact defaults are one of the highest costs for credit card companies.
Credit cards are also quite hard to administer. As credit cards are on demand they can change the balance quite suddenly either with a purchase or a repayment. Many other loans, including most unsecured loans, do not have this issue.
Another thing that can make credit cards hard to administer is the fact that the credit cards deal in small amounts compared to most other loans. The administration costs of large and small loans tend to be very similar, which will mean that the amount of money that the costs can be spread over is much smaller with credit cards.
