“Paying off your credit cards is better than any investment idea I’ve got,” Warren Buffett has said. That’s because the rate of interest is guaranteed, and so is the impact on your finances.

Currently, marketwide credit card account balances are being charged about 22% average percentage rate (APR) — more than even Buffett’s amazing 19.9% 20-year return for shareholders of Berkshire Hathaway and the 10.9% return for the S&P 500.

Yet the average American carries credit card balances of more than $6,000, according to leading credit bureaus like TransUnion and Experian.

And in total, estimates indicate Americans carry a total of more than $1.2 trillion in credit card debt.

“Average” hides a wide range as many people have no credit card debt at all while others have much higher balances. About 47% of cardholders report carrying a month-to-month balance.

You can see why President Donald Trump’s administration has called for a 10% cap on credit card interest for one year amid growing concerns about “affordability” in our country.

But can this really work? Credit card rates are generally tied to the prime rate plus a margin for risk.

The prime rate is the benchmark interest rate that commercial banks charge their most creditworthy (“prime”) customers, typically large corporations with excellent credit.

It serves as the base rate for setting interest rates on various consumer loans, including credit cards, home equity lines of credit and small business loans.

The current U.S. prime rate is 6.75%. If interest rates were indeed “capped” at 10%, that wouldn’t leave much room for banks to protect against risk, cover expenses and provide features.

So, while it would certainly be popular, I’m not sure how realistic it is.

Let’s consider the reasons credit card interest rates are so high:

• Unsecured debt: Credit cards are generally unsecured, so there in no house, car or other asset the bank can repossess if you stop paying. That means higher risk for the bank — and thus demands a higher interest rate.
• High default and delinquency: A meaningful share of cardholders pay late or not at all, so average default losses are baked into everyone’s APR, even for good borrowers.
• Unpredictable borrowing: Banks do not control what purchases people make or how much of their credit line they will use, which makes credit card portfolios riskier and justifies higher pricing.
• Product features: Cash-back, points, airline miles, insurance and other benefits must be paid for — and part of that cost is funded by higher interest rates on card holders who carry a balance.
• Cross-subsidy between users: People who pay in full monthly generate little or no interest income, so banks rely heavily on revolvers who pay high APRs on balances.
• Consumer behavior and inertia: Many cardholders focus on minimum payments and rewards rather than APR, reducing competitive pressure on rates.
• Credit card fraud: Global payment-card fraud losses were about $33 billion in 2024. The United States accounts for about 26% of global credit card volume but roughly 42% of fraud losses.
• Concerns about labor market softening: The combination of higher risk-tier exposure, more minimum payment behavior, and still elevated APRs suggest room for further losses if the labor market softens.

To illustrate the awful outcomes of carrying high APR credit card debt, especially when making minimum payments, let’s look at what happens with a $5,000 balance, a 21% APR and making standard minimum monthly payments.

One estimate from Lendingtree.com showed it would take 19 years to pay off the balance and would cost about $12,703 (including $7,703 in interest).

Another example from Sunflower Bank — based on a 20% APR with 2% minimum payments on the $5,000 balance — showed payments stretching to more than 55 years and more than $22,000 in total payments.

You can see why Buffett and so many financial advisers are so adamant about paying off credit card debt.

Bottom line: The best advice is to pay off existing high-rate credit card balances as fast as you can, AND then fully pay off balances each and every month.

This likely means having to live within your means and avoid buying things you really cannot afford. 

One good strategy is to delay making a purchase so you can think about it first. You may often find the “need” or “desire” to buy passes and leaves a credit card balance that is more manageable.

Living within your means is fundamental to financial security, and should even leave room for saving and investing.