Whether you’re opening a new credit card or setting up a store account to score savings at checkout, there’s one critical number to consider: Your APR. It stands for annual percentage rate and means the interest rate that will be applied to any outstanding balance not paid in full by the time the grace period ends. (For example, if you spend $1,000 in a month, but only pay $600, the interest rate gets applied to the remaining $400.) This can add up, which is why a good APR matters, especially if you expect to carry credit card balance long-term. So, what is a good APR? There are quite a few factors to consider.
1. What is a good APR?
Keep in mind that there are different types of credit card APRs. Each one depends on the type of balance you choose to carry. If you’re using a card for purchases or balance transfers, that’s one APR. But if you’re using it to get a cash advance, that’s another much higher APR. (Also, read the fine print on penalty APRS, which can be sky high, and are often the default if you miss making a payment by more than 60 days.)
Currently, the average credit card interest rate stands at 16 percent, according to the Federal Reserve and CreditCards.com. (This is lower than usual, due to COVID-19. A year ago, the average credit card interest rate was closer to 18 percent.) But as Jason Steele at Experian.com explains: A good APR is one that’s below the current average interest rate—as of now, we can consider 12 to 15 percent to be a good APR.
Typically, a rate like that is only granted if you have excellent credit. In fact, having a good credit score opens you up to a range of card options with more desirable APRs—including those as low as 0 percent for 12 to 24 months. (For reference, if you have “good” credit, you can expect an average APR in the 16 to 20 percent range; if you have “fair” credit, it’s likely to be between 19 and 24 percent, according to WalletHub.com.)
2. A Low APR vs. A High APR: Assessing the Perks and Calculating the Interest Owed
Depending on the card you choose, the APR comes with trade-offs. In most cases, the greater the perks (say, a credit card with major travel benefits or an in-store card), the greater the APR (sometimes as high as 24 percent). This means you have to weigh the card benefits against your likelihood of carrying debt.
For example, credit cards with a low APR—somewhere in that 12 to 14 percent range—typically have fewer benefits, but if you carry a balance, it doesn’t accrue as much interest. On the flip side, if you have a card with great benefits, but spend a lot and always pay it off in full, a high APR may be worth it.
Let’s do the math. Say you carry a balance of $1,000 on an in-store credit card with a 24 percent APR. Interest is assessed daily, so to calculate how much you’ll be charged, you need to divide the card’s APR—in this case, 24 percent—by 365. Next, convert the percent to a decimal by dividing by 100, then multiply that number by your total balance to get your average daily interest rate. Finally, multiply by the number of days in a month, and that’s the total interest charge you can expect to see on your bill. In other words, you’d pay about $20 a month in interest as long as you hold onto this balance. If your APR was 12 percent, on the other hand, you’d only pay $10 per month in interest.
All this is to say that there’s value in calculating the costs. If you’re planning to pay off the card in full every month, APR doesn’t matter much. Prioritize the rewards. But if you expect to carry a balance, APR matters a lot—and can cost you big in the long-term.
3. Here’s How to Lock in a Better Credit Card APR
• Pay attention to your credit score. You can do a soft pull of your credit score via sites like Credit Karma in order to get a better sense of your overall financial picture—and the type of APR you’ll likely receive—before you submit an application for a new card. If you’re in the excellent range, you’re in a good position to secure a lower than average APR. But if your credit score is “good” or less than that, start by researching ways you can clear up past discrepancies, pay off old debts and boost your score.
• Shop around before choosing a card. There are so many options for credit cards, which is why it makes sense to pick one that not only meets your needs (cash back, mileage earned), but also yields you the best APR for your finances. Again, good credit dictates a lot, but do your homework. Sites like WalletHub.com make it easy to comparison shop. (For example, here’s a list of the best cards for anyone with “fair” credit.)
• Select a card with an introductory APR. For those with excellent credit, take advantage of cards with 0 percent offers for a limited time, especially if the card you’re opening is meant to help with the purchase of a big-ticket item (new tires! a countertop reno!) that you can’t pay off right away, but can pay off in full by end of the year. Just remember to pay attention to the exact date the APR kicks back in.
• Pay your balance on time, then re-negotiate. If your credit is “fair” or on the lower end of “good,” you may have to prove yourself and take on a higher APR when you first open your card. That said, after six months of paying the card in full—or making regular payments on time—contact the card company and see what you can do to re-negotiate your rate. You’d be surprised how many options there are for loyal customers who pay on time.