If you plan on applying for a credit card, financial experts advise that you consider your options carefully. Pay close attention to the repayment terms before accepting any credit card offers. A high credit card APR can result in unnecessary financial struggles.
Keep reading to understand credit card APRs and interest rates, and learn how you could secure a good APR.
What Is APR?
The annual percentage rate, often shortened to APR, is the cost of borrowing money for one year. Creditors use the APR to calculate the amount of interest owed. Fees are usually included in the APR, such as origination fees and processing fees.
Borrowers pay the credit card APR when you carry a balance from one billing cycle into the next. If you pay your credit card balance in full every month, you typically do not have to pay interest fees. If you have an outstanding balance, your monthly credit card statement will display your APR rate and the dollar amount you owe.
If your credit card issuer charges fees, such as late fees, you may have to pay a higher penalty APR rate when you miss a payment. It’s essential to understand all the interest fees you will have to pay before applying for a new credit card.
What Determines Credit Card APRs?
There is no basic credit card APR for borrowers. When you apply for a new line of credit, credit card issuers will run a credit check on you. A credit check allows the creditor to view your credit report and make a qualification decision. The APR offer you receive will depend on your current credit history.
You should be aware of the five credit score ranges:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
Higher credit scores will help you get a good credit card APR. Most lenders prefer borrowers to have an excellent credit score, which is anything higher than 740. If you have a bad credit score, you may be ineligible for a credit card or offered a high APR. The higher your APR, the more money you must pay when you borrow money.
How to View My Credit Card APR
If you just got a new credit card or simply forgot your credit card’s APR, you can look at the Schumer box. The Schumer box is an easy-to-read summary box of your credit card interest rates and fees. A New York congressman named Chuck Schumer created the legislation that required financial institutions to provide a standardized display of interest rate information.
The Credit Card Act made changes to the Schumer box in 2009. Borrowers can now view the interest and fees charged if they pay only the minimum amount every month. This information must be clearly displayed on credit card statements.
You can find a copy of the Schumer box through your online credit card account. Or you can find the cardholder agreement you received upon approval.
Fixed-Rate APR vs. Variable Rate APR
There are two main types of APRs you should be aware of when applying for a credit card. You can choose between a fixed-rate APR or a variable rate APR. The kind of APR you choose determines how your repayment process will be.
A fixed-rate APR is a static interest rate you pay when you carry a balance. The percentage rate does not change, so you always know how much you will have to pay. If your annual percentage rate is 20%, it stays that rate for as long as you keep your credit card.
Variable Rate APR
A variable rate is the direct opposite of a fixed rate. The percentage rate depends on the economic market. The federal prime interest rate may decrease during an economic recession, which means your APR is low! On the other hand, if the federal prime interest rate goes up, you are subject to high-interest rate fees.
Should I Get a Fixed Rate or Variable Rate APR?
A variable interest rate is riskier than a fixed rate APR. Fixed-rate APRs make it easier to plan payments and keep track of your expenses. But on the other hand, variable rates could decrease, and you can pay less money in interest fees. Consider your current financial state and if you can afford the risk of variable rates.
Additional Types of Credit Card APRs
It’s essential to be aware of the different types of credit card APRs before applying with a creditor. Credit card companies enforce different APRs, so consider the following when comparing credit card options.
Many credit card companies offer introductory APRs to attract new borrowers. This promotional benefit is either a reduced APR or a no-interest APR. The promotional period typically only lasts a few months, after which you will have to pay the regular APR rate.
Penalty APRs offset the lending risk for creditors and incentivize borrowers to pay their monthly bills on time. You can expect to pay a penalty APR on your credit card balance when you do not meet the financial obligations of your credit card. A penalty APR is usually the highest interest rate you have to pay.
These are a few financial actions that will trigger a penalty APR:
- You miss a monthly payment
- You exceed your credit limit
- A payment bounces due to insufficient funds
If you manage a credit card wisely, you do not have to worry about paying a penalty APR.
Cash Advance APR
The benefit of credit cards is that you can withdraw cash from an ATM. However, a cash advance APR will be applied to the money you withdraw. A cash advance APR can be high because you pay for the convenience of a cash advance.
Balance Transfer APR
A balance transfer is a credit card transaction you make when you move a debit balance to a different credit card account. Balance transfers may be beneficial if you have two credit cards and one offers lower interest rate fees. However, if you transfer your credit card balance, you will be subject to the balance transfer APR and additional fees.
The purchase APR is the amount you pay for simply using your credit card and having an outstanding balance. Remember that you do not have to pay your credit card’s APR rate if you pay during the grace period. It’s a good idea to use your credit card only on expenses you can afford to pay immediately.
What Is a Good Credit Card APR?
A good credit card APR is any interest rate below the current national average. The average credit card APR borrowers receive is 16.25%. The APR offer you receive depends on your credit report and the type of credit score you apply for.
Rewards credit cards typically have higher APRs than basic credit cards. But the benefit of rewards credit cards is that you can get cashback or point rewards. If you have a bad credit score, know that you can work towards getting good credit card APRs. You can boost your credit score and avoid paying a high APR simply by paying your balance in full every month!
How To Calculate Your Credit Card Interest Rates
It’s essential that you know how to calculate the APR for a credit card. Calculating the APR is pretty straightforward, but you will need your credit card statement and a calculator.
Step 1: Find Your APR
Take a look at your credit card statement and find your APR rate. It is usually located towards the bottom of your statement. If you can’t find your APR rate, you can find a copy of the Schumer box online.
Step 2: Multiply Your Credit Card Balance by the APR
You can calculate the amount you owe annually by multiplying your APR rate by your credit card debt balance. If your APR for a credit card is 20% and your outstanding balance is $3,000, then the amount you owe in interest fees for the year is $600.
Step 3: Calculate Your Monthly Payment Amount
You can also calculate the monthly amount you owe in interest fees. Divide your APR amount by twelve to find your monthly payment amount. If you owe a creditor $600 for an entire year, you will owe $50 a month.
How To Improve Your Credit for Low-interest Credit Cards?
If you want a good APR for a credit card, you will need to work on improving your bad credit. Improving your credit score is easy once you know how the three major credit bureaus analyze financial data. By changing your financial habits and organizing your finances, you could quickly start to improve a bad credit score.
A credit score is determined through the calculation of five categories, as shown below.
Your payment history accounts for 35% of your credit score. This is the most critical factor to consider when you want to improve your credit score. Consider signing up for automatic payments to avoid missing credit card payments. You can also add payment reminders to your phone calendar if you prefer to pay bills manually.
Your total debt makes up 30% of your credit score. The more credit card debt you have, the lower your credit score will be. Having a high debt to credit ratio can make you look financially irresponsible. Ideally, you should not use more than 30% of your available credit. If you have $10,000 available through multiple credit cards, you should not use more than $3,000.
Length of Credit History
This is the only credit score factor you cannot actively improve. The length of your credit history accounts for 15% of your credit score. The longer you manage your credit card accounts, the better your credit score will be.
New Credit Inquiries
Credit inquiries account for 10% of your credit score. Inquiring for too many credit cards or loans every year can decrease your credit score. When applying for financial support, the creditor performs a hard credit check. If your credit report is pulled too often, you may appear financially impulsive on paper. Ideally, you should not apply for more than six credit accounts within one calendar year.
Having a variety of debt can look good on your credit report. Credit mix accounts for 10% of your credit score. Creditors like to see borrowers successfully manage different credit accounts. Ideally, you should have both revolving credit and installment loans. Credit cards are considered revolving credit since credit is automatically renewed once you pay your debt. Installment loans include mortgage loans, auto loans, and online no credit check loans.
Credit cards are useful financial tools that allow you to take advantage of online features. You can make online transactions, send electronic payments, and more. While it’s possible to order online without a credit card, it’s not convenient.
If you are interested in applying for a line of credit, carefully consider the APR for a credit card before inquiring. Having a good credit score can help you get a good APR. If you have a bad credit score, your credit card offers may have a high APR rate. However, remember that you do not have to pay the APR rate if you pay your balance in full by the end of the billing cycle.
To help build your credit, you can try applying for secured credit cards. Secured credit cards work the same as unsecured credit cards. Your credit limit will depend on how much money you use as a deposit. You can eventually qualify for a rewards credit card by successfully managing your secured credit card or platinum credit card.