Odd Lots Podcast Summary: "This Is Why Credit Card Interest Rates Are So High"

Podcast: Odd Lots by Bloomberg
Episode Date: November 28, 2025
Hosts: Joe Wiesenthal & Tracy Alloway
Guest: Itamar Drexler, Finance Professor at Wharton

Overview

In this episode, Joe Wiesenthal and Tracy Alloway dive into the murky world of credit card interest rates with Wharton finance professor Itamar Drexler. Building on his recent research, Drexler explains why credit card interest rates are persistently high—far surpassing rates on other types of consumer borrowing. The conversation explores the mechanics and economics of credit card lending, the surprisingly weak competitive forces at play, the powerful role of rewards and marketing, and why consumers don't seem nearly as price-sensitive as standard economic models would predict.

Key Discussion Points & Insights

1. Credit Card Basics and Opaqueness

• Credit cards as a black box: Both hosts admit to not understanding the precise mechanics or economics of credit cards, especially given the confusing number of parties involved (Visa, the banks, etc.) and the proliferation of rewards, points, and fees.
• [03:06] Tracy Alloway: "It's a very opaque business for sure... everyone's kind of doing the same thing in many ways."

2. Credit Card Revenue Streams

• Transactors vs. Revolvers:

  • Transactors pay off balances in full each month; revolvers carry balances and pay interest.
  • Roughly 60% of Americans revolve their balances and are subject to interest charges.
  • [06:47] Itamar Drexler: "About 60% of the credit card users actually revolve..."

• Sources of issuer revenue:

  • Swipe fees (interchange): Merchants pay a fee on every transaction (about 1.8% on average), with most of that going to the issuing bank.
  • Interest on balances: The biggest revenue source comes from charging interest to revolvers; average APR is now 23%.
  • [07:58] Drexler: "Turns out when you take 20 basis points of $10 trillion, kind of adds up."

3. Why Are Credit Card Rates So High?

• ROAs (Return on Assets):

  • Credit card banks' ROA is much higher (3.5–4%, compared to around 1% for regular banks).

• Default Rates Aren't the Main Story:

  • Actual average charge-off rate is about 5.8%. Most of the interest rate spread is not explained by borrower defaults.
  • [10:07] Drexler: "On average in our sample, it's 5.75% of balances are charged off... It's a substantial chunk, but not even close to a majority."

• Risk Premiums:

  • There's a significant risk premium charged, especially for low-FICO borrowers, but it still doesn't account for the high average rates.
  • [21:30] Drexler: "...the risk premium there is accounting for about similar size piece, so there's a risk premium about 5% on average..."

4. The Role of Rewards and Interchange

• Rewards drain most of the interchange:
  • About 85% of interchange fees go straight to customer rewards (cash back, points).
  • These rewards act as a kind of "network glue," encouraging consumers to keep using cards even when rewards are essentially recycled from interchange fees.
  • [18:34] Drexler: "Why charge people 1.8% and then pass through 1.57% as rewards...?"

5. Marketing and Operating Costs

• Massive marketing spend:

  • Operating expenses—primarily marketing—are a huge component of credit card bank costs, surpassing defaults as a driver of high rates.
  • Amex spends over $6 billion/year on marketing, making it a top-10 U.S. advertiser.
  • [23:39] Drexler: "It's an effective, apparently, at the margin, customer acquisition strategy... people are not rate sensitive."

• Consumers are not rate sensitive:

  • Instead of shopping for lower rates, consumers respond more to brand, advertising, and convenience.
  • The cheapest cards (from credit unions) rarely get consumer attention because these institutions don't market aggressively.
  • [24:28] Drexler: "You say, well, if their rates are so cheap, why don’t people go there?... They haven’t heard about them and they don’t care that much about the rate is my inference from this."

• The Paradox:

  • Consumers are often paying for the advertising that enticed them to get the card, resulting in a large portion of the high credit card rates being self-reinforcing marketing expenditures.

6. Competition, Fintech, and BNPL

• Barriers to entry:
  • New entrants (like Lending Club, BNPL providers) struggle due to enormous customer acquisition costs, not because of technical barriers.
  • BNPL (Buy Now Pay Later): Has innovative customer acquisition but ultimately faces similar high costs and economics as credit cards.
  • [32:21] Drexler: "I don't think the economics of the BNPL beyond that aspect of it are that different from the credit cards. And there still is very high operating and acquisition cost..."

7. Rationality and Borrower Selection

• Borrowers and financial sophistication:
  • The population that carries balances (revolvers) is less likely to comparison shop or seek out lower-rate options like personal credit lines from the very same banks.
  • The market naturally filters for less financially savvy users, somewhat like classic scam targeting.
  • [35:39] Wiesenthal: "It seems like there's a filtration on where you end up with the base of revolvers where all this money is made, who are just clearly not that financially savvy..."

8. Policy Implications and Macro Effects

• Impact of regulation:

  • Past attempts like the Credit Card Act mainly limited rate increases on current balances or capped fees—not a significant downward force on interest rates overall.
  • Competition is unlikely to bring rates down due to entrenched acquisition dynamics.

• Relationship to monetary policy:

  • Unlike mortgages, credit card rates are less responsive to Fed policy rates—movements are mechanical, not competitive.
  • Most Americans are not responsive to small changes in rates, blunting the effectiveness of standard monetary policy channels.
  • [26:16] Drexler: "I am not a huge believer that consumers at all are very sensitive to these changes in the policy rate and the fed funds rate..."

Notable Quotes & Memorable Moments

"About 60% of the credit card users actually revolve... So they're hit with these very high usually interest charges."
— Itamar Drexler ([06:47])

"The average charge-off rate on revolvers...in our sample, it's 5.75% of balances. That's a high number. But we're talking about 18% spread. So... it's not even close."
— Itamar Drexler ([10:07])

"Rewards was really a marketing flourish... About 85% of interchange gets transferred through as rewards. You could wonder, what is the point of this?"
— Itamar Drexler ([18:34])

"Consumers are not rate sensitive. The more you pay for marketing and operating expenses in the data, the higher is the average amount you're able to charge."
— Itamar Drexler ([24:28])

"Personal lines of credit... from the same companies at the same fico, they're substantially cheaper... but there's almost no marketing there."
— Itamar Drexler ([27:56])

"Marketing is a just a huge industry... at the end, it's to sell you advertising... it works."
— Itamar Drexler ([35:54])

"Amex spends over $6 billion a year on marketing... Capital One's about as big. Amex is bigger than Nike and Coke."
— Itamar Drexler ([32:57])

Timestamps for Major Segments

• 02:12: Hosts admit confusion about credit card mechanics and maximizing rewards
• 06:36: Drexler introduces the basic categories: revolvers vs. transactors
• 07:58: Deep dive into swipe fees, interchange, issuer revenues
• 10:07: Decomposing interest rates—defaults vs. other explanations
• 18:34: Rewards, network effects, and their economic rationale
• 21:30: Discussion of risk premiums and cost allocation
• 23:39: Marketing expenses as dominant cost driver
• 24:28: Consumers' insensitivity to interest rates
• 27:56: Lack of competition, lower-rate alternatives & why they're ignored
• 32:21: BNPL and fintech attempts to disrupt—why they struggle
• 35:39: The financial (un)sophistication of most revolvers
• 38:11: Regulation's limited impact (Credit Card Act, etc.)
• 39:57: Macro implications: supply-side story for inflation, post-pandemic cycle reflections
• 41:56: Should policymakers care more about credit card rates?
• 43:07: Stablecoins and payments—future potential and weird economics

Conclusion & Takeaways

• Credit card interest rates remain sky-high not chiefly because of high defaults or risk, but due to an industry structure dominated by rewards programs and massive marketing spending, which consumers ultimately finance.
• Consumers are not very responsive to rate differences—even big ones—largely ignoring cheaper alternatives due to brand, inertia, or simply a lack of awareness caused by differential marketing efforts.
• Attempts at regulatory or competitive disruption (fintech, BNPL) have not succeeded in driving down costs to consumers, in part because of persistent, high acquisition costs and entrenched consumer habits.

For Further Exploration

• Credit unions and personal lines of credit: If you carry a credit card balance, exploring these less-marketed, lower-cost options is likely beneficial.
• Rewards as a closed loop: Realize that your "points" and "cash back" are mostly returned interchange fees, not a free lunch.
• Policy focus: If concerned about household financial health, the largest wins may come not from macro rate changes, but from improving consumer financial literacy and market transparency.

For more, read Itamar Drexler’s research—or dig deeper in the Odd Lots archive for episodes about BNPL and fintech disruption.