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Credit card debt has soared to new heights—total balances hit $1.13 trillion at the end of 2023. The average credit card balance was $6,501.
If you carry a balance and only make minimum payments, your debt can spiral out of control because of the card’s annual percentage rate (APR). While this scenario is alarming, understanding your credit card APR can help you avoid or overcome debt.
Here’s everything you need to know about credit card APR, including what it is, how it’s calculated, and how it affects your balance. We’ll also offer advice on minimizing your card interest rates and effectively managing your debt.
What is APR on a credit card?
Your credit card’s APR represents the annual cost of borrowing from your card issuer.
It’s the interest rate you’ll pay on your credit card balance if you carry a balance from month to month. So if you don’t pay off your credit card in full each month, you’ll be charged interest based on your APR.
Unlike other loans, where the APR includes interest and fees, the credit card APR reflects only the interest rate because issuers can’t predict when you’ll incur additional fees like late fees.
When it comes to credit cards, APR and interest rate are interchangeable terms.
Most credit card APRs are variable, meaning they can change based on the prime rate, which fluctuates according to the federal funds rate set by the Federal Reserve. As of May 2024, the average credit card interest rate is 20.75%.
How is credit card APR calculated?
If you pay off your card balance in full each month, you won’t owe any interest, effectively making your APR 0%. However, if you have a balance, you will have to pay interest calculated based on your APR.
Credit card interest is often compounded daily, explained Leslie Tayne, founder of Tayne Law Group, a debt resolution law firm. This means that interest is added to your account every day and is included in future interest calculations.
“Because of daily compounding, the effective interest rate you pay on a credit card debt can be higher than the APR,” Tayne explains.
Want to know how much it will cost you to carry a balance? First, look at your credit card statement and find your interest rate. It is usually listed as APR. Then:
- Divide your card’s interest rate by 365 (the number of days in a year). For example, for a card with a 20.75% APR, the daily rate would be 0.057% (0.2075/365).
- Then, multiply that daily rate by your balance. If you carried a balance of $6,000 on the same card, the interest you would pay each day is about $3.41.
- Multiply the daily interest rate by the number of days in your billing cycle. This will give you a rough estimate of how much you will pay in interest each month. If your cycle is 30 days long, you’ll expect to pay about $102 in interest fees on your $6,000 balance each month.
Types of credit card APRs
Your credit card may have multiple APRs depending on how you use it, whether you’re in a promotional period, and how you manage your account:
- Buy APR: This is the APR you will be charged for purchases made with your credit card.
- Cash advance in April: If you use your credit card to get a cash advance, you’ll be charged a different APR, usually even higher than the purchase APR.
- April balance transfer: If you transfer a balance from one credit card to another, you may be charged a balance transfer APR. Some credit cards offer promotions with low or 0% interest rates on balance transfers for a certain period of time.
- April sentence: If you miss a payment or make a late payment, your credit card issuer may charge you a penalty APR, which may be much higher than your purchase APR.
What is a good credit card APR?
Now that you know the different types of APRs, you may be wondering: What exactly is a good APR? The answer depends on several factors, including the type of credit card you have and your financial situation.
Credit card type
In general, cards with rewards like cash back, points, or miles tend to have higher APRs than cards without rewards. That’s because issuers have to offset the cost of those rewards, and higher interest rates are one way to do that.
Secured credit cards, which require a cash deposit as collateral, tend to have lower APRs than unsecured cards. This is because secured cards are designed for people with limited or poor credit history and have lower risk due to the cash deposit.
Balance transfer credit cards often come with a promotional APR of 0% for a set period of time, usually 12-18 months. These cards can be a great way to save on interest if you carry a balance on a high-interest card and want to pay it off faster.
Your personal finances and credit score
You are likely to qualify for credit cards with lower APRs if you have very good or excellent credit (a FICO score of 740 or higher). That’s because issuers see you as a low-risk borrower who is more likely to pay your bills on time.
You may have trouble qualifying for low APR cards if you have fair or poor credit (a FICO score below 670). In this case, a good APR for you might be lower than the APR average for your credit score range.
Credit card companies may also consider your income level when determining your APR. Higher income may indicate a higher probability of repayment on time and vice versa. Age can also be a factor. If you’re under 21, it’s often harder to qualify for a credit card — let alone one with a low APR.
Finally, your relationship with the issuing bank may play a role in determining your APR. The financial institution may offer you a better rate if you already have a positive history with them.
How APR can affect your credit card balance
When you carry a balance on your credit card from one month to the next, you’ll be charged interest based on your APR. The higher your APR, the more interest you’ll accrue and the faster your balance will grow.
Let’s take a look at an example.
| Card A | Card B | |
|---|---|---|
| Account status | 3000 dollars | 3000 dollars |
| APRIL | 10% | 20% |
| Monthly payment | 100 dollars | 100 dollars |
It would take you about three years to pay off Card A, and you would pay a total of $3,466 — $466 of which was interest. But it would take you 3.5 years to pay off the B Card and you’d pay a total of $4,193 — $1,193 of which is interest.
With Card B, you’ll pay an extra $727 in interest fees because the APR is higher.
When you’re paying hundreds (or even thousands) of dollars in interest each year, that’s money you can’t put toward other financial goals, like saving for retirement or building an emergency fund.
Carrying high credit card balances can also hurt your credit score, making it harder to qualify for a loan, rent an apartment, or even get a job. That’s because your credit utilization ratio (how much of your available credit you’re using) is a big factor in determining your credit score.
In general, keeping your credit utilization below 30% is best for maintaining a good credit score.
How to minimize your credit card interest
To reduce the burden of high credit card APRs, consider the following strategies:
- Pay your balance in full each month. The best way to avoid paying interest charges on your credit card is to pay off your balance in full each month. If you pay your entire balance by the due date, you won’t be charged any interest on your purchases.
- Make more than the minimum payment. Putting an extra $50 or $100 into your monthly balance can help you pay off your debt faster and save on interest charges.
- Look for ways to lower your APR. Depending on your credit score, you may be able to qualify for a balance transfer credit card with a 0% introductory APR. This can give you some room to pay off your balance without accumulating interest charges. You can also try negotiating with your current credit card issuer to see if they will lower your APR.
- Avoid cash advances. Cash advances usually come with higher APRs than regular purchases, so it’s best to avoid them if possible. If you need to get a cash advance, pay it off as soon as possible to minimize interest charges.
- Negotiated a lower APR. If you have a good credit score and a history of making payments on time, you may be able to negotiate a lower APR with your credit card issuer. Call your issuer and ask if they can lower your APR, or consider switching to a credit card with a lower APR if you qualify.
conclusion
Credit card APR can significantly affect your daily budget and long-term financial goals. You can take control of your credit card debt by understanding how APR works, its impact on your balances, and strategies to minimize interest charges.
Remember, the best way to avoid paying interest on your credit card is to pay off your balance in full each month. If you can’t do that, try to make more than the minimum payment and avoid cash advances and balance transfers whenever possible.
The opinions expressed are solely those of the author, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, endorsed or otherwise approved by any of the entities involved in the post.
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