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Choosing a credit card can be tricky with all the options out there. One of the most important factors to consider is the interest rate, also known as the annual percentage rate or APR. This rate determines how much you’ll pay in interest charges if you carry a balance.
In this comprehensive guide, we’ll discuss everything you need to know about credit card interest rates. You’ll learn how rates are calculated, strategies to find and compare rates, and tips to get the lowest rate possible. Whether you’re searching for your first card or looking to get better terms on your current one, you’ll be an expert by the end!
Key Takeaways
- Interest rates on credit cards are expressed as APRs and determine how much you pay to borrow money.
- Cards can have different APRs for purchases, balance transfers, cash advances, etc.
- Your personal rate is based on your credit score and other financial factors.
- Always compare APRs when shopping for a new credit card.
- You can negotiate a lower rate with your bank by improving your credit or negotiating.
- Paying off monthly balances avoids interest charges entirely.
Understanding Interest Rates
Let’s start with the basics – what exactly are credit card interest rates and how do they work?
Credit card interest rates are the cost you pay to borrow money on your account. The rate is expressed as an annual percentage rate (APR) that you’re charged on any unpaid balances carried over month to month.
For example, if your APR is 20% and you carry a $1,000 balance, you’ll be charged around $167 in interest that month (20% of $1,000 is $200 annually, or $16.67 monthly).
This means that credit card interest can add up quickly if you routinely carry balances. That’s why it’s so important to understand how rates work when comparing cards.
Types of Rates
One key point is that credit cards often have different APRs for different types of transactions:
- Purchase APR – The standard rate charged on any purchases made with the card.
- Balance Transfer APR – The rate charged on transferred balances from another credit card.
- Cash Advance APR – The rate applied to any cash advances taken from your credit limit.
- Penalty APR – A higher rate charged if you make a late payment or otherwise default on your account.
Balance transfer and cash advance APRs are often higher than purchase APRs. The penalty APR may be near 30%.
Variable vs. Fixed Rates
The interest rate on most credit cards is variable, meaning it can go up or down based on market factors. This is in contrast to fixed rates that stay the same.
For variable rates, your APR is tied to an index like the prime rate. When that index rises, so does your card’s rate.
Fixed rates do have the benefit of stability and predictability. But variable rates start lower, and you may be able to negotiate if they rise.
Your Personal Rate
Each card actually offers a range of rates based on your creditworthiness. For example, a card may advertise rates from 15% to 25%.
Where you fall in that range depends on your credit score, income, and other details lenders use to determine your risk level. If you have excellent credit, you’ll qualify for the lowest possible rates.
This means you need to look beyond blanket APRs and find the rate you’ll actually pay based on your financial profile.
Finding and Comparing Rates
Now that you know the ins and outs of credit card interest rates, let’s discuss how to find and compare them when shopping for a new card.
Where to Locate Rates
All credit card companies are required to clearly disclose interest rates and fees. You can find this info:
- On the company’s website – Look for a “Rates & Fees” page.
- In mail offers – The Schumer Box outlines key terms.
- From your bank – Ask about rates for which you may qualify.
For variable rates, you’ll see the current APR along with the index and any “margin” added by the card issuer.
Factors That Influence Your Rate
As mentioned earlier, the APR range advertised by a card only provides a rough estimate. Your actual rate will depend on:
- Credit score – The higher your score, the lower your rate. Improving your credit can help you qualify for better rates.
- Income – Lenders like to see you have enough income to manage payments.
- Existing debts – Too many credit cards or other debts may signal risk to lenders.
- Credit history – Having a long history of responsible borrowing helps.
So even if you have “good” credit, look closely at what exact rate you will pay based on your full financial picture.
Strategies to Get the Best Rate
Here are some tips to get the lowest rate possible when searching for a new credit card:
- Shop around thoroughly – Compare offers from multiple issuers.
- Get pre-qualified – This shows you rates you’ll actually qualify for before applying.
- Focus on credit unions – They often have lower average rates than big banks.
- Ask your bank to match – See if they’ll beat a competitor’s offer to keep you as a customer.
- Mind sign-up bonuses – Cards with big rewards may charge higher interest rates.
The more options you explore, the better deal you can potentially find. Just be sure to compare all the costs and benefits of each card fully.
Calculating Interest Charges
Now let’s discuss exactly how credit card companies charge interest on balances you carry.
How Daily Interest is Determined
Interest charges are based on your average daily balance over the billing cycle. Here are the steps:
Your APR is divided by 365 to get the daily periodic rate.
That daily rate is applied to your average daily balance.
The daily interest amounts are added together for the billing cycle.
For example, a 20% APR would have a daily rate of 0.0547% (20% / 365 days). On a $2,000 average daily balance, that would equal $1.09 per day in interest ($2,000 * 0.000547).
Over a 30 day billing cycle, your total interest charge would be $32.76 (30 * $1.09).
Grace Periods and Interest Charges
Many credit cards offer a grace period on new purchases. This means you can avoid interest if you pay the balance off in full each month.
However, there is no grace period for things like balance transfers and cash advances. Interest starts accruing immediately on those transactions.
If you do carry a purchase balance, any new purchases will start accruing interest right away for the next billing cycle.
The Cost of Carrying a Balance
As you can see, carrying a credit card balance can become very expensive due to compounding interest charges.
For example, a $5,000 balance at 20% APR would incur over $1,000 in interest in one year!
That’s why it’s critical to pay close attention to interest rates when comparing card offers if you may carry a balance. Even small rate differences can add up over time.
Lowering Your Interest Rate
Finding a new card with a low rate is one way to save on interest. But you may also be able to reduce the rate on your existing accounts.
Improving Your Credit Score
As discussed earlier, the higher your score, the better rate you can qualify for. Improving your credit through steps like paying bills on time and paying down debts can lead to a lower APR.
Most issuers review your credit periodically to adjust rates. Keep your credit profile in good shape to maintain the best rates.
Asking for a Lower Rate
You may be able to negotiate a lower interest rate on your current card by contacting the issuer. Be polite but firm when asking.
It helps to note factors like:
- You’re a long-time customer in good standing.
- You’ve recently improved your credit score.
- Competitors are offering you lower rates.
If the issuer won’t budge, you may have to change cards to get the best interest rate.
Transferring to a Lower Rate Card
Doing a balance transfer to a new card with a lower APR is a fast way to save on interest. Many cards offer 0% intro APR periods as well.
Just be mindful of balance transfer fees, which can be upwards of 5% of the amount transferred. Do the math to ensure you will still come out ahead.
Avoiding Interest Altogether
The very best way to avoid credit card interest is not to pay any! With the right habits, you can use your cards and pay zero interest.
Paying Off Monthly Balances
The simplest approach is to pay your balance in full each month by the due date. This allows you to take advantage of the grace period on new purchases.
If you charge $500 this month, paying the $500 bill on time avoids any interest.
Making Multiple Payments
You can further reduce interest by making payments multiple times per month.
Each payment knocks down your balance, resulting in lower daily interest charges. This can really add up over time.
Even an extra $20 payment mid-cycle can save money.
Using Introductory 0% APR Offers
Opening a new card with a 0% introductory APR is another way to avoid interest entirely for a period of time. These offers allow you to pay down or transfer existing balances slowly without accruing new interest charges.
Just be diligent about paying off the full amount before the intro period ends and the standard APR kicks in.
Best Practices for Rate Shopping
Here are some final tips for finding the best credit card interest rate:
- Check your credit reports and scores so you know the rates you qualify for.
- Compare all costs of a card, not just the interest rate. Fees, perks, rewards programs and other features impact the total value as well.
- Don’t open too many new accounts rapidly, as this can hurt your credit profile. Space out applications over time.
- Read terms and conditions closely to ensure you understand when rates may change and how balances are handled.
- Consider consulting with a credit counseling agency if you are struggling with debt and need help negotiating rates.
- Evaluate your spending habits and credit card usage regularly to make sure your interest rates and fees are appropriate.
Taking the time to be an informed, savvy rate shopper will serve you well in finding the optimal credit card and interest costs.
Frequently Asked Questions
Below are answers to some common questions on comparing credit card interest rates:
What is a good credit card interest rate?
A good credit card interest rate is generally below the national average, which is around 20% as of 2023. A great rate is 15% or lower. Individual factors like your credit score heavily influence the rate you can qualify for.
How often do credit card interest rates change?
For variable rate cards, your APR can change whenever the underlying rate index it’s tied to changes. This can happen multiple times per year but is limited by consumer protection laws. Fixed rates generally change only if you default or the card issuer provides advance notice of an increase.
Can I negotiate my current credit card APR?
Yes, you can call your issuer and negotiate to try lowering your interest rate. Having a higher credit score, paying on time, threatening to close your account, or noting competitors’ offers improves your odds of success. But there is no guarantee.
Do I need to care about interest rates if I pay in full each month?
If you never carry a credit card balance, the interest rate is less important. You can focus more on other factors like annual fees, rewards programs, and sign-up bonuses when comparing cards. But rates still impact you if you ever do revolve a balance.
What is the best way to avoid paying credit card interest?
The surefire way to avoid interest is to never carry a balance and always pay your bill in full and on time each month. Also making multiple payments during the month or utilizing a 0% balance transfer offer can eliminate interest costs.
Does opening a new credit card hurt my credit score?
Opening a new card can cause a small, temporary drop in your scores. However, responsibly managing the account by making payments on time and keeping balances low will improve your credit in the long run. Just avoid opening too many new cards in a short timeframe.
We hope this guide gives you confidence in evaluating credit card interest rates and finding the best offers. Let us know if you have any other questions!
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