Credit cards streamline the process of financing anything, from the most basic needs in difficult times, to some of the finer things in life that we might otherwise not be able to pay for upfront.
Having access to a credit card saves you from having to wait for credit approval when making a large purchase. And should you find yourself in a tight spot financially, credit cards offer some breathing space until you sort your financial situation out. The main downside to credit cards is the same as with all other types of personal loans and lines of credit – interest charges.
What Is APR on a Credit Card?
The Annual Percentage Rate (APR) is essentially the fee that lenders charge when you borrow money for a period of time. The rate reflects the cost of borrowed funds annually, however in the case of credit cards, it’s applied over a significantly shorter period.
The APR on your credit card balance, which is carried forward from month to month, usually works out to be higher than interest rates charged on other forms of credit like personal or auto loans.
Every financial institution offering credit cards has its own APR fee structure. Since APRs are not standardized, it is hard to say what a bad or good APR is. The easiest way to define it is to say that good APR rates are below the national average.
When looking into applying for a credit card, you need to evaluate your options carefully by comparing APRs & any other fees they carry. The information is usually available on the bank or credit union’s website. However, the rates may vary depending on your credit rating.
Comparing Credit Card APRs
Scoping out the lowest credit card interest rate possible is the best way to ensure you’re not paying out too much interest on your monthly balance. On the other hand, many banks and credit unions offer perks that may tip the scale when choosing a credit card.
What Is the Average Credit Card APR?
Any credit card with an APR below the average interest rate at the time is considered to be a good credit card APR. Establish the current average interest rate before comparing credit card APRs to have an accurate baseline. For example, the average credit card APR back in 2016 was 12.35% and has risen to 16.54% as of May 2022.
Each person receives a unique APR depending on their creditworthiness, so the average is only there as a general guideline. Also, keep in mind that some credit card issuers charge annual fees on credit cards, so be sure to read the fine print.
Credit Cards with 0% APR
Some financial institutions like Citi or American Express offer introductory offers with low intro APR or even 0% APR for a fixed period of time which then converts to a variable APR. Other credit cards offer fixed or variable APRs from the get-go.
Unfortunately, credit cards for those with bad credit usually come with higher APRs or require a down payment in case payments have defaulted. The higher rate is due to the options for credit approval being more restricted when compared to those designed for people with average or good credit scores.
If you intend to pay off your balance as soon as your receive your statement, it might make more sense for you to opt for a rewards credit card instead of a regular new credit card with a low APR.
A rewards credit card offers cashback on every dollar spent through credit utilization, travel miles, or points that you may redeem later but may come with a higher APR. The higher APR will not affect you financially if you settle the balance due before the monthly billing cycle ends.
Different Types of Credit Card APR
Credit card companies offer a range of credit cards with varying APR rates to suit every potential customer’s needs.
Before applying for a new credit card and committing to a particular financial institution, thoroughly read the terms and conditions. Having a basic understanding of the different APR offers will help you evaluate which credit card option might be for you.
Here is a breakdown of the most widely available types of APR:
- Fixed APR: Fixed APR rate is locked in when you sign up for your credit card, and the rate remains fixed until you cancel your credit card. Some financial institutions and banks might penalize you for falling behind on your bill payments by temporarily increasing your APR rate. Fixed purchase APR rates are not very common, however.
- Variable APR: Variable APR is the most standard APR rate available. Variable APR increases or decreases based on a pre-set benchmark rate, usually the current prime rate plus a set percentage (for example, the prime rate plus 4%). The prime rate fluctuates constantly, so your variable purchase APR will do so, too, be it in your favor or not.
- Promotional or Introductory APR: Introductory APR is a heavily discounted intro APR rate usually offered for a limited introductory period solely as a promotion to attract new customers. New bank customers or existing customers who take up a promotional offer will benefit from a drastically reduced APR period on balance transfers or purchases for a limited time. Once the promotional or introductory offer has expired, customers’ APR will usually increase to a regular variable rate depending on their credit rating.
- Balance Transfer APR: The APR rate on balance transfers might be a lower interest rate than the rate you’re due to pay on an existing card. Moving your debt from a card account with a high APR rate to a different card account with a lower APR rate could be a smart way to avoid increasing your debt by paying a higher interest rate. Some banks and credit unions apply a balance transfer fee, so read your credit card’s terms and conditions before transferring from one credit card account to another.
- Cash Advance APR: The APR rate applied to cash advances or withdrawals from ATMs or bank branches is usually extremely high. It is in your best interest to forgo dipping into any cash advances through your credit card as much as possible to avoid paying the hefty APR rates that come with it.
- Penalty APR: Some banks and credit unions have set balance repayment timeframes. Should you fall behind on payments or forget to make the transfer on time, you will likely be made to pay a penalty APR. The rate may vary depending on how late the payment is and the terms and conditions set by your card provider.
Where can I find my credit card’s APR?
Your credit card’s APR should have been clearly explained when you signed up for your card. You have plenty of options if your agreed rate has slipped your mind.
- Monthly Statement: Credit card statements typically have a section that breaks down the interest on your balance. The statement will list your APR in the calculations section of your monthly statement.
- Terms and Conditions: A quick search on your financial institution’s website or looking through your original credit card enrollment paperwork is a sure-fire way to find your APR.
- Contact your financial institution: Should you still be unable to find your APR, you can reach out to your bank or credit union to formally request the agreed APR on your credit card.
How is APR Determined?
APRs have been increasing steadily over the years and only appeared to have lost momentum during the Covid-19 pandemic. However, the Federal Reserve has been increasing its key interest rate again in 2022, so APRs are rising as things are returning to normal.
Credit card issuers determine the APR offered on cards based on criteria. Many banks and credit unions offer various credit cards with different APRs to meet the needs of their customers instead of adopting a one-size-fits-all approach. Lenders determine which of their customers may benefit from low-interest credit cards.
Rewards credit cards that give cash back usually come with a high APR as they offer more value to the customer. However, they are often not available to people with bad credit. Credit cards designed for people with lower credit scores come with higher APRs.
Customers’ creditworthiness is usually one of the main determining factors for the offered APR. The higher your credit score, the less risky lenders will deem you, and the lower your APR. Checking your FICO or credit score can help you manage your expectations with what APR you can get.
Most lenders require a full credit report and dive deep into your past payment history on other credit cards and personal loans before approving your credit or defining your APR. Current debt-to-income ratios are assessed too, so having an excellent credit score alone will not guarantee a low APR.
Improve Your Credit Score for a Better APR
The most common factor to being offered a high APR is a bad credit score. Luckily, credit ratings are not permanent, and there are plenty of things you can do to improve your score and get better rates or perks down the line. Credit scores are based on your previous payment history patterns, current debts, the length of your credit history, and other variables.
Understand your level of risk
Look into your accounts to better understand what makes lenders consider you a high-risk borrower. You might even want to consider purchasing a full credit report that will highlight these problematic areas for you.
The free credit reports that you can access through any credit report agency might not give you enough information to pinpoint the areas you need to work on to improve.
Make sure your credit reports are accurate
Credit report agencies collect information from financial institutions to compile credit reports on people. The data collection system is not perfect, and there’s always a chance of errors in your credit report that negatively impact your credit score. According to federal law, credit report agencies must provide you with a free copy of your credit report once every 12 months if you request it. Should you find any mistakes in your report, file a dispute with the credit report agency and contact the financial institution concerned with the error.
Settle any debts or bills on time
Paying your bills late due to negligence or bad financial planning has a huge impact on your overall credit score. Setting up auto-pay for recurring loans or bills and processing individual payments will greatly impact your credit score in the long run.
Keep your total debt in check
The amount of debt you have across multiple lenders significantly impacts your credit score, so you should always keep it from spinning. You’ll find a reference to “credit utilization” on your credit reports.
If you’re taking on debts with other lenders as your credit limit restricts you, it might be beneficial to speak to your lender to increase your credit limit instead of going to a new lender as it looks worse.
How to Avoid Paying APR
Choosing a credit card with a lower APR is a great idea; however, optimizing the way you use your credit cards to avoid paying interest is your best plan of action for your personal finances.
Generally speaking, credit card billing cycles come with a grace period of around 20 days between the statement date and the payment due date, which allows ample time for cardholders to settle bills before interest accrues.
Since your credit score doesn’t improve by carrying balances forward, you might as well avoid paying interest and settle any pending balances in full before their due date. Paying your statements off ahead of time will also help you maintain your credit score.
Here are some tips to avoid paying interest on your credit cards:
Make a budget and stick to it
Set strict spending boundaries for yourself and plan for large purchases ahead of time to avoid relying on credit card accounts as much as possible. Budgets should be split carefully to allow for all your fixed monthly payments like mortgage payments, rent, and bills, along with having a buffer for expenses that may crop up. Hold yourself accountable and track your expenses to keep your spending in check.
Treat your credit card like a debit card
Since credit cards are not directly linked to checking accounts, it’s easy to lose track of your spending. Make an effort to reflect on how much you’re spending to ensure you keep your pending credit card balance within a range that you can pay off in one go when you need to.
Pay off your balances in advance
The best way to avoid paying interest to credit card companies is to settle your outstanding payments before the due date lapses and interest becomes due. You may consider developing the habit of settling your balance as soon as you receive your credit card statement.
Alternatively, you could pay off smaller amounts over the month to make sure you would have covered the balance due while the statement is still open.
Another viable option could be setting up automatic payments from your checking account to completely avoid the hassle of paying off your credit card bill. Always ensure that you have enough cash in your checking account to cover the balance, or you’ll risk incurring charges when the automatic transfer goes through.
Interest payments may seem insignificant on a month-to-month basis. But they add up in the long run, making it more difficult for you to pay off the balance on your credit card down the line.
Checking your credit card statements carefully before paying off your outstanding balance will help you immediately notice any fraudulent charges.
Frequently Asked Questions
What is an acceptable credit card APR?
The best way to determine an acceptable APR is to understand the current average APR and clearly understand what APR rates you can get from different banks and credit unions. Any APR below the current average is very good. Do some research to find out the current average APR to know how your offer measures up before accepting a rate from your lender.
Should you have an existing credit card with a higher APR than what you can get elsewhere, it might be time for you to give your credit card issuer a call to renegotiate your APR.
Is an APR of 24.99 good?
An APR of 24.99 is a reasonably average rate for people with a low credit rating. When compared to the average APR, it is on the high side. You might want to look into improving your credit score or contacting your credit card issuer to try to obtain a better APR.