Understanding the Annual Percentage Rate (APR) on your credit card is crucial for managing your finances effectively. The APR is the interest you’re charged for borrowing money when you carry a balance from one billing cycle to the next. But what makes a ‘good’ APR, and what should you aim for when choosing a credit card? Let’s delve into these questions.
The APR on a credit card is expressed as a yearly interest rate. It includes the interest charges on your outstanding balances as well as any other fees the card might have. For example, if you have a credit card with a 20% APR and you carry a balance of $1,000 for a year, you would pay about $200 in interest.
Different credit cards can have different APRs, and the same credit card can have different APRs for different types of transactions. For instance, purchases, cash advances, and balance transfers may each have their own APR.
Factors Affecting Your APR
Credit card companies determine the APR based on several factors:
- Credit Score: The most significant factor that determines your APR is your credit score. Individuals with higher credit scores typically receive lower APRs because they are considered less risky to lenders.
- Type of Card: Some types of credit cards naturally come with higher APRs. For instance, rewards credit cards that offer cash back, points, or miles typically have higher APRs than those that don’t offer rewards.
- Prime Rate: The prime rate, which is the interest rate that banks charge their most creditworthy customers, also plays a role in determining your APR. Most credit card interest rates are variable and change along with the prime rate.
So, What’s a Good APR for a Credit Card?
The average credit card APR was around 16%. However, ‘good’ can be subjective and depends largely on your creditworthiness and the type of credit card.
If you have excellent credit, a good APR would be below the average — around 12-14%. On the other hand, if your credit is not as strong, a good APR might be slightly above the average.
For rewards credit cards, the APR tends to be higher, typically between 17% and 24%. So, for these types of cards, a ‘good’ APR might be around the lower end of that range.
It’s always a good idea to check the most recent averages.
The Bottom Line
While getting a low APR can save you money if you carry a balance, the best way to use a credit card is to pay off your balance in full each month. Doing so allows you to avoid interest charges entirely. However, if you think you’ll carry a balance regularly, then aiming for a credit card with a lower APR can be beneficial.
Remember, the advertised APR on a credit card is often a range, and the exact rate you receive will depend on your creditworthiness. Therefore, it’s essential to understand your credit health and work on improving your credit score to receive better terms. Lastly, always read the fine print and understand all the terms before applying for a credit card.