Credit cards are convenient, but they can also be costly. If you don’t pay your bill in full every month, you’ll owe interest. The amount you owe is based on the annual percentage rate that the card charges. Different types of cards carry different rates. A good credit history can help you get lower rates, but each card usually has a minimum rate regardless of your credit score. Here’s a quick look at how credit card rates are determined, what a low APR is and how low-APR credit cards can help you save money.
What Does APR Mean?
When you charge purchases to your credit card, you’re technically taking out a loan. Your credit card company pays off your purchase, and you owe the credit card issuer that amount by your due date. If you don’t pay in time, you owe interest. Your annual percentage rate, or APR, is typically a yearly rate. So, if your card charges 18 percent interest and you charge $1,000 to your card and don’t pay it off, you’ll owe an additional $180 by the end of the year.
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What Is a Good APR?
As of November 2017, the average credit card interest rate on all credit cards was 13.16 percent, according to the Federal Reserve Bank of St. Louis. By this measure, any credit card rate below 13.16 percent can be considered a good rate. However, credit card rates vary based on the type of credit card. Your best bet for finding a truly low APR is to find a dedicated low-rate card. Rewards cards, cash back cards, cards for students and cards for consumers with bad credit tend to have interest rates in the 16.99% to 24.99% APR range. Low-rate credit cards, on the other hand, can have a credit card rate as low as 7.25% APR, but might not come with perks like earning rewards.
Types of APR
Most credit cards offer more than one type of APR. As a consumer, it’s important to understand when each type of rate applies, and how your credit card interest rate might change depending on how and when you’re using your card. Here are five common types of APRs:
A purchase APR is the normal rate that applies to a credit card for any purchases you make on the card.
In order to attract business, some cards offer a low initial rate, sometimes as low as zero percent. Typically, this rate only lasts for a limited time, such as six to 18 months. After this time, the rate can jump up significantly to the purchase APR for which you were approved.
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Balance Transfer APR
Some cards offer a reduced rate — as low as zero percent for up to 12 to 18 months — if you transfer a balance from one credit card to another. You might pay a transfer fee, which is commonly 3 percent or more of the amount you transfer. As with an introductory APR, a balance transfer APR typically expires after a period of time, after which you’ll pay the normal APR on the card.
Cash Advance APR
Most credit cards allow you to take cash advances. Unlike cash withdrawals you make with an ATM card, a cash advance is a loan issued to you by your credit card company. You’ll pay a special interest rate on this amount, which is often higher than the standard purchase APR.
If you don’t abide by the rules of your credit card account, you’ll be slapped with a penalty APR. This often happens if you are 60 days late or more with your credit card payment. Penalty APRs often top 30 percent.
Why a Low APR Is Important
When you open a credit card account, your likely intention is to pay off your entire balance every month before interest charges hit. However, the truth is that the average American carries a credit card balance of $6,354, according to an annual study conducted by credit reporting agency Experian. If you absolutely have to carry a balance, having the lowest possible interest rate is in your best interest. With an 18 percent interest rate, your balance will roughly double every four years, thanks to the power of compound interest. With a rate of 4 percent, however, your balance will take about 18 years to double. The lower your interest rate, the less interest you will pay if you carry a balance on your credit card.
How to Lower Your APR
The best way to get a good APR on a credit card is to check your credit before you apply. Most credit scores range from 300 to 850. The higher your score, the more likely a lender will offer you credit at a better rate. You can improve your credit score by making all debt payments on time, having a long credit history, limiting credit applications and keeping your debt low.
One option for lowering the interest rate on your outstanding debt is to get a zero-percent balance transfer offer. Many card companies offer these teaser rates. Although zero-percent transfer rates are only for a limited time — and might come with additional fees — you can save a lot of money by lowering your APR from 13 percent or more down to zero.