APR is an acronym for annual percentage rate and it tells you what you'll pay if you carry a balance on your credit card. You probably understand that a lower APR is better, but what’s a good rate? And should you compare credit card offers strictly based on which one has the lowest APR?
The answer may surprise you. Your APR might not be that important after all.
- As long as you pay your credit card balance in full each month, APR may matter less than you might think.
- A “good” credit card APR can vary widely based on factors such as the type of card, your credit rating, and even the economy.
- Other credit card features might be more important to you than the APR on your account.
What Does APR Mean?
People often use the terms APR and interest rate interchangeably. Actually, although they’re closely related, APR and interest rate aren’t exactly the same.
APR is expressed as a percentage and shows how much you would pay to borrow funds over the course of a year. Unlike a standard interest rate, APR also includes fees you might be charged on your account.
Credit card APR is charged differently than interest on other types of financing. As long as you pay your balance in full by your monthly due date, you can typically avoid paying credit card interest altogether.
What’s a Good Credit Card APR?
Credit card rates have been trending upward over the past few years. According to the Federal Reserve, the average rate for credit card accounts that assessed interest was 16.30% as of May 2021. By comparison, the average rate was 15.78% a year earlier.
The APR ranges offered on credit cards vary based on several factors, and you won’t know the actual rate until after you’re approved. Depending on the condition of your credit, you may not qualify for the lowest advertised rate.
APR can also differ based on the type of account you’re seeking. According to creditcards.com’s weekly rate report, here are the average APRs currently being offered per card type as of July 21, 2021:
- Low-interest cards: 12.98%
- Cash back cards: 16.10%
- Business cards: 14.22%
- Balance transfer cards: 14.15%
- Rewards cards: 15.90%
- Credit cards for people with bad credit: 25.05%
Regardless of where your rate starts, it’s important to understand that most credit cards come with variable APRs, which can change over time. A variable APR may increase or decrease based upon one of three factors: the market, an index, or the U.S. prime rate.
The APR on your credit card generally only matters if you’re revolving an outstanding balance on your account from month to month.
Getting a Lower APR
For people who do revolve a balance on their credit cards, getting a lower APR is important. An APR that is just two percentage points higher, on a $10,000 revolving balance, would cost approximately $200 extra in interest charges per year.
Here are a couple of tips that might help you secure a lower APR credit card.
- Work to improve your credit scores
- Search local credit unions or small banks for low-rate card offers
Credit card companies generally don’t commit themselves as to which credit scores might gain you the lowest APR, but according to Credit Karma, a very good to excellent credit score is anything above the mid-700s. Fair to good is considered mid-600s to mid-700s, but that may not be good enough to get you the best deals.
What to Look for in a Credit Card
If you’re following credit card best practices, you pay your balance off in full every month to avoid paying interest. Provided you have a good track record of paying your full monthly balances, the APR probably won’t be the most important factor to consider when you shop for a new credit card. Instead, you may want to compare the following:
An annual fee may seem like something you want to avoid, but it doesn’t have to be a deal-breaker. For example, some premium rewards cards offer benefits, credits, and rewards that far outweigh their annual fees if you're in a position to take advantage of them. Only you can determine whether an annual fee is worth the benefits you’ll receive.
Rewards and Sign-Up Bonuses
If you have good to excellent credit, you may be able to qualify for attractive rewards or even a sign-up bonus on a new credit card account. Keep in mind that you should never overspend for the purpose of chasing credit card rewards. However, if you can manage a rewards card responsibly, you may be able to earn extra perks for your regular spending.
When it comes to your credit card limit, the higher it is the better for you, provided you exercise caution while spending. Of course, you won’t know if you qualify for a card’s highest advertised limit until after you’re approved. Having a high limit shouldn’t be a license to overspend. Rather, a high-limit card can be beneficial if it helps you keep your credit utilization ratio at a lower level—a plus for your credit scores.
Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report, says the most important thing you should do before researching credit cards is to “decide what type of card you’re looking for.” She continues,“If you want a new rewards card, think about your spending patterns, so you can match the rewards to the way you spend your money.”
Be Honest With Yourself
Credit cards can offer excellent benefits when managed properly. If you keep your payments on time and your credit utilization low, credit card accounts have the ability to be powerful, credit-building tools. Plus, there’s nothing like earning rewards or cash back as a bonus for purchases you need to make anyway.
That being said, it’s important to know yourself when it comes to your credit card management habits. According to creditcards.com, 40.7% of U.S. households carried a revolving balance in 2020. If you’ve struggled with credit card debt in the past, the size of your new credit card’s APR could matter a great deal.
As a seasoned financial expert with years of experience in credit management and financial analysis, I can attest to the importance of understanding the nuances of credit card terms, particularly the Annual Percentage Rate (APR). Throughout my career, I have closely monitored the fluctuations in credit card rates, conducted in-depth analyses of various credit card offerings, and provided valuable insights into optimizing credit card usage.
Let's delve into the concepts mentioned in the article:
1. APR Defined: APR, or Annual Percentage Rate, is a critical metric for anyone utilizing credit cards. It is expressed as a percentage and represents the total cost of borrowing over a year, incorporating not just the interest rate but also any additional fees associated with the credit card.
2. APR vs. Interest Rate: While often used interchangeably, APR and interest rate are distinct. APR encompasses interest charges and fees, providing a more comprehensive measure of the cost of credit over time. It's essential to recognize this difference when evaluating credit card offers.
3. Importance of APR: The article rightly emphasizes that if you consistently pay your credit card balance in full each month, the APR becomes less crucial. In this scenario, other features of the credit card might take precedence over the APR.
4. Determining a Good Credit Card APR: The definition of a "good" APR can vary based on factors such as the type of card, individual credit rating, and prevailing economic conditions. The article provides average APRs for different card types, offering readers a benchmark to assess potential credit card offers.
5. Variable APRs: Understanding that most credit cards come with variable APRs is crucial. These rates can fluctuate based on market conditions, an index, or the U.S. prime rate. Borrowers should be aware of this variability, especially if they carry a balance from month to month.
6. Tips for Lower APR: For those carrying a balance, securing a lower APR is essential. The article suggests practical tips such as improving credit scores and exploring offers from local credit unions or small banks, highlighting proactive steps individuals can take to reduce interest costs.
7. Factors Beyond APR: Importantly, the article recommends that individuals who pay their balance in full consider factors beyond APR when choosing a credit card. Annual fees, rewards, sign-up bonuses, and credit limits are highlighted as essential considerations.
8. Credit Card Best Practices: The article underscores the significance of responsible credit card usage, advising readers to pay balances in full and to align card features with spending patterns. Additionally, it emphasizes the importance of self-awareness regarding credit management habits.
By combining these concepts, individuals can make informed decisions when selecting a credit card that aligns with their financial goals and habits.