If you’ve ever shopped for a credit card, you know that APR (annual percentage rate) is one of the most important considerations. This annualized interest rate determines how much more money you owe in the event of a balance carried after the grace period ends (typically, one month after a billing cycle). Consumers with strong credit histories tend to receive better APRs and introductory offers that waive any interest accrued for a limited time.
Credit cards often have APR ranges (for example, 15.99% to 19.99%) that you’d fall into, depending on your credit health. This is a significant factor in determining what type of credit card you want to keep, though it’s important to note that if you pay off your card in full every month, you’ll never be charged interest. We recommend fully paying off your balance each statement period to avoid debt so that APR is not charged in the first place.
Credit card APR (annual percentage rate) is the interest rate you pay on any balance that is rolled over from month to month. Every credit card charges interest automatically if the balance isn’t paid in full by the deadline — typically one month after the monthly statement is posted. The average APR in 2019 was about 16%, according to the Federal Reserve.
APR is annualized, meaning it doesn’t reflect compounding interest. Most credit cards compound interest on a daily basis, so the effective interest rate will actually be higher than what your credit card suggests.
APR can be fixed or variable, depending on the terms and conditions set by a credit card provider. It can also depend on your creditworthiness, which takes into account your credit history, past and existing debt, credit score, and other factors.
APR can come in a few different forms:
- Intro APR: Limited-time interest rate. To attract new customers, credit card providers sometimes offer a lower-than-usual purchase APR or even waive the interest within a certain length of time (i.e., one month, one year) after card activation.
- Ongoing APR: The interest rate after the introductory period of the intro APR runs out.
- Purchase APR: The interest rate you pay on purchases made with your credit card. When APR is referenced, it usually refers to purchase APR since it’s the most common.
- Penalty APR: The interest rate you pay if you fall behind on credit card payments (typically, if you don’t pay the minimum payment within 60 days of the statement posting). This is often much higher than purchase APR.
- Balance transfer APR: The interest rate you pay on balances you transfer to another credit card. Typically higher than a purchase APR, but many credit cards offer intro balance transfer APRs that can be as low as 0%.
- Cash advance APR: The interest rate you pay if you use your credit card to borrow funds from the available balance. Tends to be higher than the purchase APR and does not come with a grace period, meaning you’ll be charged the cash advance APR every day until it is paid back.
- Variable APR: Your rate can be changed by the credit card provider at any time.
- Fixed APR: Your rate is set in stone and will not change from the time you are accepted for the credit card.
The APR you receive depends on a variety of factors, but it’s mostly dependent upon the prime rate, which is the benchmark that credit card companies use to set its rates for good customers. This prime rate typically changes in response to rate changes from the Federal Reserve, so that means individual credit card APRs tend to fluctuate regularly too.
Creditworthiness is also an important factor. Credit card companies offer their best rates to customers who have solid credit histories that can attest to their ability to spend and borrow responsibly. Your overall credit health takes into account the debt you owe, balances carried, payment history, and credit score (defined by either the company’s proprietary formulas or one of the three major credit bureaus). If a credit card indicates a range in APR — say, 15.99% to 19.99% — this means that the APR you receive within that range will be dependent on your credit.
What is considered an excellent credit level depends on the credit card company, but typically, this means that you’ve never declared bankruptcy or defaulted on a loan, been significantly late on bills, and have had a credit card or loan for a lengthy period of time at a high credit limit.
In a best-case scenario, APR doesn’t matter, because if you pay off your credit card in full each month, no initial interest is charged. However, we recognize that this is not always realistic for many households. According to a 2019 study from CreditCards.com, about 37% of U.S. households carry credit card debt from month to month, which amounts to $5,673 in debt per cardholder.
The average credit card APR hovers around 15%. Interest rates will depend on what type of credit card you apply for, but anything lower than the average is great. Typically the highest rates are from benefit-rich rewards credit cards, secured credit cards intended for people rebuilding their credit, and store-branded credit cards. It seems counterintuitive that customers on opposite sides of the credit spectrum would be charged higher-than-usual rates. Still, the reason is that those higher rates are often used to counterbalance expensive credit card perks or losses experienced when people don’t pay their bills on time.
It’s possible to receive an APR in the single-digit range if you go with a credit card from a credit union. The trade-off is that you would have to join the credit union to apply for the card, and it may be more challenging to get approved if you have bad or no credit.
If you have a strong credit score, you’re more likely to get a better interest rate on your credit card. Unfortunately, if you have bad, limited, or no credit history, this can make shopping a challenge, but there are many ways you can increase your creditworthiness over time. Most of it boils down to simple actions that prove that you can be trusted with the money you’re borrowing. This means paying your balance on time every month, keeping your accounts open to establish a long history, limiting the number of credit cards and loans you apply for, and limiting your monthly balances to about 30% of the total credit limit.
Many credit cards will give you a 0% intro purchase APR to sweeten the deal. If the offer is for, say, 12 months, then that means you won’t be charged any interest on purchases for the first 12 months you have your card. Once this runs out, you’ll be charged the ongoing purchase APR set by the credit card’s terms and conditions. Keep in mind that if you carry a balance during the introductory period, you must pay at least the minimum payment per statement period. Otherwise, you risk forfeiting the 0% offer and paying the ongoing APR instead.
The main way to avoid interest is by never letting it accrue in the first place. We recommend paying off your credit card balance in full, every month, on time. In that situation, you’ll never have to worry about what the APR rate is. If you can’t afford the full balance, then we suggest cutting your spending on the card and paying more than the minimum payment per month. Paying as much as you can ensures that you’re paying down the principal and not just the interest accrued. Otherwise, your debt will continue to mount.
Consolidating debt may be the smartest move if you have debt on a high-interest credit card. Many credit cards come with introductory 0% APR periods if you have good credit, so if you’re eligible for one, then we suggest transferring that debt to the new card in order to avoid further interest accrual. If you are transferring a debt balance, make sure to check the balance transfer fee so any additional costs don’t come as a surprise.