All credit cards come with more than a few moving parts. Among them is an annual percentage rate, or APR — the cost of borrowing money using the card. However, the tricky thing with credit cards is that they can have multiple APRs, each of which applies to a different transaction type.
What Is APR on a Credit Card?
When you don’t pay your credit card balance in full each month, your card issuer charges interest on your carried balance. The rate you pay is the card’s APR — a figure expressed as a percentage. A card’s APR is the annual cost of borrowing money using the card.
For instance, say you make a $1,000 purchase using your credit card but can’t pay the balance in full. If your credit card has an APR of 22%, you will pay $220 in interest over the year to borrow that $1,000.
You’ll find APRs on various financial products, including mortgages, personal loans and student loans. However, there’s an important difference between APRs on credit cards and these loans. With loans, an APR includes its interest rate and fees. With credit cards, APRs and interest rates are the same figure.
How Does Interest Work on a Credit Card?
While loans often have fixed APRs that remain the same for the life of the loan, credit cards have variable interest rates. This means that your card’s APR will fluctuate alongside market interest rates and rise and fall in tandem with the prime rate, which tracks the federal funds rate set by the Federal Reserve. Knowing your current APR can help you calculate your credit card interest for a particular balance or planned purchase.
Credit Card APR Types
Speaking of balances, credit cards come with different types of APRs. These APRs are applied to various transaction types and vary by card, cardholder and issuer. Knowing the credit card APR types can help you better compare credit cards when you’re in the market to add one to your wallet.
— Purchase APR. This rate can be variable or fixed and applies to all new purchases.
— Balance transfer APR. This interest rate applies to balances transferred from one card to another. Depending on the card issuer, a balance transfer APR can also be a limited-time promotional or introductory APR.
— Introductory or promotional APR. Some cards will extend limited-time offers to new and existing cardholders, including low interest rates on purchases and balance transfers. These rates will revert to the purchase APR when the promotional period ends.
— Cash advance APR. Generally higher than the purchase APR, this interest rate is applied when you borrow cash from your credit card. These transactions are typically performed at ATMs.
— Penalty APR. If you have a returned payment or your payments become 60 days late, your card issuer might charge a penalty APR, which can be higher than your standard purchase APR.
What Is a Good Credit Card APR?
What’s considered a “good” credit card APR depends on two main factors: the credit card type and your finances. Both work together to determine the ultimate APR you’ll pay on carried balances. According to the Federal Reserve, the average APR across all accounts was 21.76% as of August 2024. A good credit card APR would be lower than the average.
How Credit Card Type Impacts Rates
While all credit cards share the same shape, the card category has an outsized impact on the APR you’ll pay. For instance, U.S. News found that rewards credit cards like airline credit cards and those issued by individual retailers tend to have the highest APRs. Student credit cards, business cards and secured credit cards all ring in with some of the lowest APRs.
Why the difference in APR among card types? Rewards programs can be expensive to manage, and issuers pass those expenses on to cardholders through higher APRs. On the other end of the spectrum, secured cards have a lower risk for card issuers since they hold cash on deposit to offset the credit line. That translates to lower APRs.
[Read: Best Low-Interest Credit Cards.]
How Your Finances Impact Credit Card Rates
Your credit score and financial health also affect your credit card’s APR. Typically, borrowers with higher credit scores will qualify for the lowest possible APRs, and those with lower scores will encounter higher APRs. So, back to the question about what’s considered a “good” credit card APR. While the answer isn’t exact, a good credit card APR will be the best interest rate you can qualify for based on the card type and your creditworthiness.
[Read: Best Credit Cards.]
How to Lower Your Credit Card APR
And no matter your credit profile, it could be possible to lower your credit card APR if you’re a loyal cardholder with a great payment history. “Credit card companies want to remain competitive and may work with you if you feel your APR is too high,” says Brandon Robinson, president and founder of financial planning firm JBR Associates in Plano, Texas. His tip? Contact your card issuer every six months to make sure you’re getting the lowest possible interest rate.
If you hit a wall and your card issuer won’t budge, it could be time to shop around for a different card if you’re not married to the benefits. But take your time; doing so can protect your credit. “Do your card research before submitting an application for a new card,” says Hannah Wardenburg, a certified financial planner, personal wealth strategist and founder of The Wealth Collaborative. “A new application is considered an inquiry on your credit report, so if you already have less-than-favorable credit, you may only hurt your chances of being approved.”
Credit Card APR Tips to Keep Debt in Check
While credit card interest rates are pretty straightforward, many people don’t take the time to look at the rates on the cards they have, says Jordan Gilberti, a certified financial planner and independent wealth advisor. For those who aren’t on top of their finances, he adds, “This can lead to a snowball effect of interest accumulating and a debt hole that can be really rough to dig out of.”
He sees many consumers encountering trouble with promotional balance transfer offers. People fail to plan to pay off the transferred balance in full before the promotional period ends and are then left with a chunk of debt at a high interest rate. “For example, if you put $6,000 on a balance transfer card that has a promotional rate of 0% for 18 months, you’d have to put around $330 a month on the card to have it fully paid off before the regular APR kicks in,” Gilberti says. And if you can’t make that happen, you might want to rethink the balance transfer.
Another strategy that could lead to paying less interest on carried balances is rethinking the type of card you need. For instance, you might like the idea of flashy airport lounge access and racking up miles on your purchases. However, a travel credit card’s annual fees and APR might be significantly higher than a card with fewer bells and whistles. Consider the features you’ll honestly use and need in a card and whether they’re worth the higher APR when a low-interest, less flashy card might do just fine.
More from U.S. News
What’s the Average Amount of Credit Card Debt in the U.S.?
What Credit Score Do I Need to Get a Credit Card?
Best Credit Cards for Easy Approval This Holiday Season
What Is APR? Understanding Credit Card Interest Rates originally appeared on usnews.com
Update 11/06/24: This story was previously published at an earlier date and has been updated with new information.
