Edited by: Keri Stooksbury
& Kellie Jez
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Credit cards can be a potent financial tool when used correctly. They allow users to build credit, earn points, and open doors for vacations and rewards that would not be possible without them. However, if credit cards have a dark side, it’s their annual percentage rate—or APR. Unfortunately, if you’re like 40% of credit cardholders,¹ you will probably carry a balance at some point.
APR is a visualization of the annual interest rate consumers must pay for unpaid portions of their monthly credit card bills. It is the price credit card users pay to borrow money from credit card issuers, usually at a much higher rate than other forms of borrowing money, like an auto loan or personal loan.
Knowing your credit card’s APR and ensuring you have the lowest APR is incredibly important. But 40% of Americans who carry a balance on their cards don’t know their credit card’s APR, according to a recent study by CNBC.².
While no credit card APR is necessarily “good” for the consumer, they vary among cards and users. With APR being affected by several factors, including credit card type, credit score, and available promotions, it’s important to research and get a reasonable rate.
Even if you plan on paying off your credit card in full each month and never carrying a balance, life happens! Being aware of your card’s APR details is important so you can minimize your interest costs.
To start, your Purchase APR is the standard APR that applies when you make purchases. This purchase APR can be either fixed or variable:
Either way, interest payments can be small in the short term, but over the long run, they can add up to significant fees and make it harder to pay down your card. For example:
If you have a $1,000 balance on your card that you pay over 6 months, you’ll spend $13 more in interest with a higher APR:
This adds up much quicker if you have a higher balance and/or take longer to pay off the balance. The interest on a $10,000 balance that takes you 3 years to pay off will be $1,033 more with a higher APR:
This shows that it’s always best to be aware of your credit card’s APR and try to get the lowest rate your issuer offers.
So, where do you find your credit card’s APR? You have a couple of options:
If you haven’t sought out or received a credit card offer in some time, you may have an antiquated understanding of the average credit card APR. To find out whether you’re getting a reasonable APR, we turn to the average APR in the U.S. Over time, credit card interest rates ebb and flow, so it’s important to have a pulse on what the average APR looks like today.
Below is the average APR in the U.S. over the past few years, according to the Federal Reserve:¹⁰
In 2016, America’s average APR was 12.35%. In 2020, the average APR in the U.S. rose to 14.71%. That is more than a 2% net increase over 5 years. Interestingly, the average APR in 2020 was slightly lower than in 2019, when it reached 15.05%. Rates have steadily increased from those historic lows following the Fed’s interest rate hikes. Currently, the average APR is 20.93%.³
However, this doesn’t mean that you’re locked into that credit card interest rate if you apply for a card today. Every individual receives a unique APR based on several factors, including the card type and credit score. Let’s dive into some of these contributing factors, starting with the type of card you want.
The type of credit card you want to qualify for affects the APR offered, with premium cards tending to have higher APRs. According to Business Insider’s data collected from S&P Global, there are 3 major card types: classic, platinum, and rewards. Below are the average APRs for each:⁴
However, we can break this down even further. ValuePenguin analyzed terms and conditions for 200 U.S. credit cards and determined their average APRs. Here is its breakdown of average APR by card type:¹¹
Cash-back cards offer a sweet deal with an average APR of 24.12%. On the other end of the spectrum are secured cards, which require a deposit upfront used as collateral in case users default on their payments. With a high average APR of 26.96%, there’s no reason to choose a secured credit card unless bad credit leaves you no other options.
How does your credit card compare? If your APR is significantly higher than these averages, it might be a good time to give your card’s issuer a call to negotiate a lower APR.
Speaking of bad credit, the most important metric to consider is your credit score. In fact, card issuers rely heavily on your credit report and credit score when evaluating your risk level and assigning an APR to your credit card offer accordingly. Building up a good credit score will help you secure an APR on the lower end of the range for the card you are considering.
Here is the average APR by credit score according to Investopedia:¹²
Credit score ranges as defined above are based on FICO’s credit score ranges:
If you have bad credit, your average interest rate will likely be 25.07%. Attaining fair credit will decrease that rate slightly from 24.62% to 29.74%. Interestingly, the analysis shows that those with fair credit are actually worse off than those with bad credit. Of course, neither of those credit levels is optimal. You want excellent credit to be eligible for the best APRs — ranging from 20.24% to 25.5% on average.
The outlier here appears to be the bad/no credit field, but keep in mind that most cards offered for people who fall within these credit score ranges are secured cards and/or cards with much lower credit limits. Both of these reduce the risk to the issuer.
Rates as a whole are increasing, but you can qualify for the best available options by improving your credit score.
Each issuer sets the APRs for its credit card products. The issuers all have a slightly different risk-based pricing policy that guides the range of interest rates they advertise and offer to customers.
For example, Discover and Wells Fargo offer cards with a much lower APR than their competitors — both in the lowest APRs and the median APR across all cards. Barclays Bank and American Express have a median that is higher than competitors. These issuers also have cards with the highest APRs offered, right around 30%.
Another way to score a low APR is to look for cards that offer promotional rates. These come in various forms, such as 0% interest for an introductory time period or a zero-dollar balance transfer fee. While promotional rates can absolutely help you secure lower interest rates, debt.org cautions that they are liable to decrease your credit score due to increased risk to credit issuers.¹³
If you go for a promotional rate, it’s always best to read the fine print. There will likely be conditions and exclusions to be aware of. You might owe interest on missed payments during the promotional period or immediately owe interest on any balance you carry when the promotional period ends.
What happens when the promotional rate ends? It’s important to know whether you are on a variable or fixed-rate plan and the differences between the 2.
Variable rates are, just as the name implies, variable. Credit issuers can change them at any time without warning to the cardholder. The rate depends on a few variables.
The issuer will consider several variables, like the Federal Reserve Discount Rate, interest on U.S. Treasury Bills, or the prime rate published by the Wall Street Journal. Then, they will add a margin of percentage points (more for users with bad credit) to develop an APR.
For example, the prime rate is 8.5% as of September 2023. According to debt.org, a card company might add 10 to 12 percentage points for those with good credit and 23 to 26 percentage points for bad credit. That means credit depending, your variable APR would be between 18.5% and 34.5%.
Fixed rates, then, are the opposite. Consumers with fixed-rate plans are locked into interest rates unless the card issuer gives a 45-day notice. The cardholder can then opt out of the plan or continue at the newer rate. There are, of course, certain situations where a fixed rate could change, including:
There are several types of APR. Knowing how each factors into different usage scenarios with a credit card can help you manage your interest effectively. Here are the most important APR types to be aware of, according to the Bank of America:¹⁴
Introductory APR is synonymous with promotional APR, as discussed above. Whether you are getting a balance transfer deal or a lower interest rate, it typically lasts for a specified amount of time before the purchase APR takes its place.
This standard APR will be applied to all purchases you make with the card. It is typically the rate advertised when you apply or are offered a plan from a card issuer.
Fail to make the minimum payment on time, and you’ll be charged a penalty APR, a rate even higher than your card’s default. Per the CARD Act, credit card issuers are allowed to raise your APR if you are more than 60 days late on payments during the first year of your account. A typical penalty APR is 29.99%.⁵
Card issuers often charge a different, higher interest rate when you borrow cash using your credit card. There are no grace periods for this.Hot Tip:
Don’t confuse APR with APY.
If you already have a credit card with an issuer and you’re hoping to get them to lower your existing APR, you can do a few things to renegotiate a lower rate. Reach out to your credit card issuer directly and ask if they’d be willing to negotiate a lower APR. Here’s some information to have on hand:
If you’re in the market for a new credit card, the best thing you can do is ensure your credit score is as high as possible. To do this, be sure to:
A great deal goes into deciding your personal credit card interest rate, from your credit score to the type of APR applied to the type of credit card you want. Understand the nuances of credit card interest before jumping into the first offer that arrives in your mailbox. Otherwise, you could be in for a rude awakening when your introductory rate expires, and suddenly, you owe 29.99% on that late payment.
If your card has a higher-than-expected interest rate, try to negotiate a lower rate with your issuer. It’s also important to be aware of other APRs in case you need a balance transfer, miss a payment, or take advantage of an introductory offer on your card.
A 24.99% APR is not particularly good for those with good or excellent credit. However, it is a reasonable rate for credit cards if you have average or below-average credit. Still, you should aim for a lower rate if possible.
This means that after factoring in certain indices like the prime rate or Federal Reserve Discount Rate and then adding margins consistent with your credit, the resulting APR is 26.99%. Because this is a variable plan, it is subject to change without notice.
Your APR is affected by your credit score, but that is not the only variable to determine it. Whether you have a fixed or variable plan or are applying for a promotional rate will affect your APR, as will the type of card it is. However, people with good credit can expect an average range of 19.29% to 28.49% APR.
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