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Credit card debt has risen to new highs — total balances reached $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 could spiral out of control due to the card’s annual percentage rate (APR). While this scenario is alarming, understanding 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 its impact on your balance. We’ll also provide tips on minimizing your card’s interest rates and managing your debt effectively.
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 that 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 APR includes both interest and fees, credit card APR only reflects the interest rate because issuers can’t predict when you’ll incur additional charges like late fees.
When it comes to credit cards, APR and interest rate are interchangeable terms.
Most credit card APRs are variable, which means 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 credit card APR is calculated
If you pay your card balance in full every month, you won’t owe any interest, effectively making your APR 0%. However, if you carry a balance, you’ll have to pay the accrued interest based on your APR.
Credit card interest often compounds daily, explained Leslie Tayne, founder of Tayne Law Group, a debt solutions law firm. That means that interest is added to your account each day and factored into future interest calculations.
“Because of daily compounding, the effective interest rate you pay on a credit card debt can be higher than the APR,” explains Tayne.
Want to know how much carrying a balance will cost you? First, look at your credit card statement and find your interest rate. It’s usually listed as APR. Then:
- Divide your card’s interest rate by 365 (the number of days in the year). For example, for a card with 20.75% APR, the daily rate would be 0.057% (0.2075/365).
- Next, multiply that daily rate by your balance. If you had a balance of $6,000 on that same card, the interest you’ll charge daily is around $3.41.
- Multiply the daily interest charge by the number of days in your billing cycle. This will give you a rough estimate of how much you’ll pay in interest each month. If your cycle lasts 30 days, you’d expect to pay around $102 in interest charges on the $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:
- Purchase APR: This is the APR you’ll be charged on purchases made with your credit card.
- Cash advance APR: If you use your credit card to take out a cash advance, you’ll be charged a different APR, usually even higher than your purchase APR.
- Balance transfer APR: If you transfer a balance from one credit card to another, you may be charged a balance transfer APR. Some credit cards offer promotions of low or 0% interest rates on balance transfers for a set period of time.
- Penalty APR: If you miss a payment or make a late payment, your credit card issuer may charge you a penalty APR, which can be much higher than your purchase APR.
What is a good credit card APR?
Now that you know the different types of APRs, you might be wondering: What exactly is a good APR? The answer depends on a few factors, including the type of credit card you have and your financial situation.
The type of credit card
Generally, cards with rewards like cash back, points, or miles tend to have higher APRs than cards without rewards. That’s because issuers need 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. That’s 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 down faster.
Your personal finances and credit score
You’ll likely 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 view you as a low-risk borrower who is more likely to pay your bills on time.
You may have trouble qualifying for cards with low APRs 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 average APR for your credit score range.
Credit card companies may also consider your income level when determining APR. A higher income can indicate a higher probability of timely repayment 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.
Lastly, your relationship with the issuing bank can play a role in determining your APR. The financial institution may offer you a better rate if you already have a positive track record 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 your balance will grow faster.
Let’s take a look at an example.
| Card A | Card B | |
|---|---|---|
| Account balance | $3,000 | $3,000 |
| APR | 10% | 20% |
| Monthly payment | $100 | $100 |
It would take you around three years to pay off Card A, and you’d pay a total of $3,466 — $466 of which was interest. But it would take you 3.5 years to pay off Card B, and you’d pay a total of $4,193 — $1,193 of which is interest.
With Card B, you’d pay an extra $727 in interest charges because the APR is higher.
When you’re paying hundreds (or even thousands) of dollars in interest each year, that’s money that you can’t put towards 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 loans, 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.
Generally, keeping your credit utilization below 30% is best to maintain 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 your balance in full each month. If you pay off 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 towards 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 breathing room to pay off your balance without accruing interest charges. You can also try negotiating with your current credit card issuer to see if they’ll lower your APR.
- Avoid cash advances. Cash advances typically come with higher APRs than regular purchases, so it’s best to avoid them if possible. If you need to take out a cash advance, pay it off as quickly as possible to minimize interest charges.
- Negotiate a lower APR. If you have a good credit score and a history of making on-time payments, you can 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.
The bottom line
Credit card APR can significantly impact 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.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.