What is a reasonable annual percentage rate for a credit card? The annual percentage rate, or APR, of a credit card quantifies the cost of borrowing money.
In other words, if you carry a debt beyond the grace period on your credit card, your APR determines the rate of interest that the card issuer may charge on that balance.
If you’re wondering what a decent credit card APR is, compare it to the average credit card APR, which is now above 16%. If the card’s annual percentage rate is less than the national average, it is a great rate.
Even a credit card with a national average interest rate is a fantastic alternative, particularly if it’s one of today’s finest credit cards with incentives, bonuses, and advantages.
Avoid credit cards with annual percentage rates that are much higher than the national average. If you hold a balance on those cards, you risk paying a significant amount of interest.
That is why certain credit cards with 0% APR provide an initial period during which you will not be charged interest on your transactions.
Understanding how credit card interest works can assist you in selecting the credit card with the lowest APR package.
Consider the following when evaluating APRs, as well as how to decide what constitutes a reasonable APR for a credit card:
How Your APR Is Calculated
Before we explain what a decent annual percentage rate is for a credit card, let us first examine how a credit card’s annual percentage rate is established.
When a credit card is opened, the APR is decided not only by the applicant’s credit score or report, but also by the prime rate in the United States.
Major banks use the prime rate to determine the interest rate on consumer lending products such as credit cards. Lenders take the prime rate and add extra margins in order to limit the risk of default and earn interest on outstanding loans.
The federal prime rate in the United States is 3.25 percent as of July 2021. For borrowers with good credit, an APR of prime rate (3.25 percent) plus a lender’s margin of 10% results in a 13.25 percent APR.
In comparison, a borrower with low credit may pose a greater risk and so earn an APR equal to the current prime rate (3.25 percent) plus the lender’s margin of 20%, for a total APR of 23.25 percent.
Along with a borrower’s creditworthiness and the prime rate, lenders consider a borrower’s financial records, such as payment history, credit report, and debt-to-income ratio (DTI).
Credit cards that give rewards such as points, miles, or cashback on transactions typically have higher annual percentage rates than non-rewards cards.
If you pay your credit card account in whole and on time each month, the APR you get may be negligible, as interest is only charged on balances carried or cash advances. It is typically prudent to avoid holding a credit card debt.
APR Calculator for Credit Cards
The majority of credit card firms offer a variety of credit packages with varying APRs.
If you study the terms and conditions of a credit card, which everyone should do before to applying for one, you’ll discover that the APRs vary significantly.
Numerous credit cards offer variable interest rates, and understanding the various types of APRs available is vital when considering card possibilities.
Several of the most prevalent credit card annual percentage rates are as follows:
Introductory APR or promotional APR: A promotional rate (sometimes as low as 0%) provided to new clients on purchases or debt transfers for a limited period of time.
Introductory deals often run from a few months and twenty months or more, at which point the APR will raise to a variable rate dependent on the cardholder’s creditworthiness.
Purchase APR: The interest rate charged on new purchases made with a credit card and carried forward into the following billing cycle. This is the most prevalent sort of APR found on credit cards.
APR for Cash Advances: The interest rate charged when a credit card is used to withdraw cash from an ATM or bank. Cash advance APRs may be quite high, which is why we do not advocate using your credit card for these transactions.
Transfer of balance APR: Annual percentage rate charged when transferring an existing debit amount from one credit card account to another. A balance transfer from a high-interest credit card to a lower-interest card can be an intelligent strategy to reduce debt quicker.
Penalty APR: The rate charged to your card account if you breach your agreement by failing to make timely payments. Penalty annual percentage rates (APRs) can climb as high as 29.99 percent if a payment is 60 days late.
How to Qualify for a Low-Interest Credit Card
The most effective strategy to obtain a low APR is to develop sound credit practices. Here are some immediate activities you may do to boost your score:
Keep track of all of your credit card payments and make them on time, every time. Payment history accounts for 35% of your credit score, so ensure that it is favorable.
Avoid reaching the limit on your credit cards. Maintaining a low balance will help you improve your credit usage ratio.
Make a concerted effort to pay off as many of your outstanding bills as feasible. Strive to become debt-free. As your credit score improves, search for low-interest credit cards.
The higher your credit score, the more favorable interest rates you are likely to receive. Ultimately, paying off your debt each month is the greatest method to prevent paying interest.
What Is a Reasonable Annual Percentage Rate for a Credit Card?
Now that you understand how credit card Apr works, let’s discuss what constitutes an excellent credit card Apr. However, the lower your APR, the better.
Though we urge that no one ever carry a balance, advance cash, or do anything else that might result in the accrual of interest on a credit card balance.
A lower APR will mitigate the cost of missing a payment or running out of alternatives and being forced to carry a debt.
Credit card APRs are typically exorbitantly high in comparison to other forms of borrowing, and we recommend never spending more money than you have, even while using a credit card to help establish credit, for convenience, or to receive incentives.
Because APRs are highly variable, there is no one-size-fits-all definition of what constitutes a “good” APR.
According to the Federal Reserve, the average interest rate on current United States credit cards is 14.61 percent on all accounts as of May 2021.
The average interest rate for credit card accounts that retain a balance and earn interest is significantly higher at 16.30 percent.
Banks frequently provide credit cards with annual percentage rates ranging from 12% to 24%. In general, the higher your credit score, the more likely you are to qualify for an interest rate around the bottom of the range.
On the other hand, the worse your credit, the greater the APR you might expect. If you’re unsure whether a certain credit card offers a competitive APR, these ranges and averages might provide a decent starting point.
A rate of interest that is lower than the national average is considered a “good” rate of interest. Several cards, on the other hand, are promoted to individuals with mediocre credit ratings and come with unreasonably high interest rates. It is fairly uncommon for these cards to have a variable APR of more than 25%.
While the banks that issue these cards promote them as beneficial to individuals seeking to establish credit, maintaining a balance at a 25% annual percentage rate may create a cycle of consumer debt. Avoid holding a load on these high-interest credit cards.
If you’re making a major purchase and intend to carry a load for a short length of time, consider a credit card with a 0% introductory APR.
Cards with 0% promotional rates provide you more time to pay off debt without incurring interest costs. Bear in mind that once the promotional period has expired, the APR will revert to a variable rate based on creditworthiness.
What to Expect from Low-Interest Credit Cards
Cards that enable you to carry a load at a lower APR often provide fewer benefits than many popular rewards credit cards, and only a handful will give incentives such as high cashback or bonus miles.
Additionally, these cards may not be as aggressively pushed as cards with well-known rewards schemes, so you may need to conduct some research to locate low-interest credit cards.
Cards with low APRs or initial 0% APRs are typically available to those with stronger credit ratings, so investigate ways to increase your credit score prior to applying.
Debt transfer fees are often assessed on credit cards, even those with 0% introductory APR rates, but some cards remove this cost for balance transfers made within the first few months of card membership.
Balance transfer fees should be considered if you are considering moving a balance to a credit card with a 0% introductory rate.
What to Expect with Cards with a High Annual Percentage Rate
While credit cards with higher annual percentage rates may offer benefits such as cashback, frequent flyer miles, or transferable points, not all credit cards with high annual percentage rates generate big rewards.
Numerous basic cards with high annual percentage rates are also available to those with bad credit or who are judged hazardous by the issuing bank.
If you pay off your credit cards in full each month, never miss a payment, and never carry a balance, you will never be charged a higher APR for a rewards credit card.
If this describes your credit card usage, credit card rewards can be a great bonus, and you should consult Forbes’ guide to the top rewards credit cards.
On the other hand, if you want to finance a purchase using a credit card, be prepared to periodically skip payments or carry a debt.
Avoid high-interest credit cards that provide incentives; the prizes you receive will be negligible in contrast to the interest payments on high-interest credit cards.