How to Avoid Near All-Time High Average Credit Card APR
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Credit cards are a convenient way to make purchases, but they can come with some hefty costs if you don't pay your balance in full each month. With interest rates approaching their highest level, the difference between paying 19% and 29% APR on credit card debt could mean hundreds of dollars in additional charges over the life of your balance.
By taking the time to understand your credit card plan and being mindful of spending habits, you can avoid debt traps or overspending while still enjoying the benefits of using a credit card. Here's how!
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What's the average APR on credit cards?
The average credit card APR is 20.35%, according to CreditCards.com, but the Federal Reserve's recent rate increase may move the average beyond its peak of 20.37% and land close to 21%.
Credit card lenders typically follow the Fed's lead. When the central bank raises the federal funds rate, lenders also increase the APR charged on credit cards. Interestingly, lenders are free to set their own credit card rates — they don't have to take cues from the Fed. But APR can be close to 30% or potentially more for borrowers with bad or average credit.
Here are a few examples:
- Total Visa Unsecured Credit Card: This card by the Bank of Missouri charges an APR of 35.99%. But wait, there's more: Borrowers will also have to pay a one-time fee of $89, an annual fee of $75 for the first year (then $48 thereafter), and a monthly service fee of $8.25 after the one-year introductory period is over. All this is for a $300 credit line, which comes to $225 after the first-year fee.
- First PREMIER Bank Gold Credit Card: The card has an annual fee of $50 to $125 for the first year and $45 to $49 afterward. There’s also a $55 to $95 one-time processing fee. The APR is 36.00%. Initial credit limit ranges between $150 and $613. This card charges a late fee of up to $39.00.
- Citi® / AAdvantage® Executive World Elite Mastercard®: This popular card charges variable APR of up to 21.24% - 29.99% for purchases. It comes with an annual fee of 595.
While lenders charging over 30% interest on credit cards are outliers, they exist. But generally, credit cards with the highest APRs target people with bad credit.
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How APR works
It's important to understand how APR works regarding credit cards. APR stands for annual percentage rate and is the amount you will be charged on an annual basis for carrying a balance from month-to-month on your card.
Understanding the difference between a 19% and 29% interest rate can be a major factor in your financial well-being. Even a small increase in the interest rate can lead to large differences in how long it takes you to pay off your balance and how much interest you will have to pay over time.
Let's look at the impact of a higher APR. For example, if you have an existing balance of $3,000 with 19% APR and make monthly payments of 4% ($120) each month, it will take approximately 24 months to pay off the balance. If you increase the APR to 29%, your monthly payments would stay at $120 per month, but it will now take about 35 months to pay off your balance. That's an additional 11 months and more than $1,000 in interest charges!
Understanding the differences between the APR on credit card debt can mean considerable savings over time. Taking advantage of promotional offers such as low intro APR or maintaining good credit scores are great ways consumers can save money while managing their finances responsibly.
If you carry a balance from month to month, it is important to try and get a lower rate. If you have a good credit score, research what other cards are available with better rates, or call your current credit card issuer and explain that you want to keep your business with them if they can offer a lower APR.
What are the different types of credit card interest rates?
Credit card interest rates can vary significantly depending on the card type and credit issuer. Generally, there are three main types of credit card interest rates.
- Purchase APR: This APR kicks in when you make minimum payments and fail to clear your credit card balance fully.
- Balance transfer APR: Say you take out a new credit card to transfer outstanding balances on other credit cards to this new card. That's when this APR is applied, also known as balance transfer fees.
- Promotional or intro APR: These offers provide low or 0% APR for a limited time — usually six months to one year — before switching to a higher ongoing APR after the promotional period ends.
- Cash advances APR: This is the rate at which you'll be charged if you use your credit card to withdraw money from an ATM.
How to avoid paying high interest on credit cards
By managing their finances proactively, people can minimize the risk of unnecessary interest charges and get the most out of their credit cards. With careful planning and budgeting, it is possible to save money over time by avoiding costly late payments or excessive balances.
These simple measures will help everyone stay in control of their credit card usage and spending habits, ultimately leading to better financial security.
- Shop around: You wouldn't buy the first house you see, right? The same goes for credit cards. Compare your options online and choose the best card for your situation.
- Pay off in full: Another way to keep interest charges low is to pay the monthly balance. This avoids any interest charges as well as avoiding any debt traps that may occur with revolving debts.
- On time, every time: It's important that you make payments promptly. Keeping track of all incoming and outgoing payments will help avoid overspending or late payments.
It is important for all borrowers to understand the terms and conditions of their credit cards before signing up. Knowing what kinds of fees and interest rates are associated with a credit card can help you make informed decisions that will ultimately prove beneficial in the long run.
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How to get a low interest rate on credit cards?
Getting a low interest rate on credit cards is not always easy, but there are steps you can take to help ensure that you get the best deal possible.
It is important to have good credit. Credit scores typically range from 300-850, with higher numbers indicating a better score. If your score falls into the excellent or good category (750-850 and 700-749, respectively), then you will likely qualify for the best rates available. On the other hand, if your score falls into the fair or bad categories (650-699 and 300-649, respectively), you may still be able to get a decent interest rate, but it will likely still be higher than what those with higher scores can get.
Shop around: Besides keeping an eye on your credit score, it helps to shop around for different credit cards and compare their interest rates. Many banks and financial institutions offer numerous types of cards, so it pays to research and find out which one fits your needs best. It may also be worth considering any special offers such as introductory 0% APR for certain months or cash-back rewards when making purchases.
Read through all of the terms and conditions before signing up for any card so you know exactly what fees may be associated with having it and what kind of restrictions apply when using the card. Understanding this information upfront can help prevent unwelcome surprises, so it’s always worth taking the time to read through everything carefully before signing the dotted line.
Is a low-interest-rate credit card worth it?
A lower-interest-rate credit card can be a great option for consumers looking to reduce their overall credit card debt. When you pay less interest on your balance, more payments go towards reducing the principal owed. This can help you save money over time, as the interest rate on a lower-interest-rate credit card is typically much less than on standard cards. Additionally, some cards offer additional rewards and benefits that can help offset their cost. These may include cash back, travel points, or special offers from retailers or service providers.
For example, if you have a $5,000 balance and pay 15% interest on it and make monthly payments of $250, it will take you four years and eight months to pay the balance in full. However, if you switch to a low-interest rate credit card with an 8% APR, you can save over two years in repayment time because more of your payment goes towards paying down the principal owed instead of being lost in interest fees.
The downside to low-interest rate credit cards is that they typically require higher credit scores than standard cards to qualify. This means that someone with average or bad credit might not be able to get one. Furthermore, these types of cards also tend to have higher annual fees than other cards do. Depending on how often you use your card and what kind of rewards or special discounts it offers, this could cost more than what you save from the lower interest rates each year.
Whether or not a low-interest rate credit card is worth it depends upon your financial situation and the goals you're trying to reach with your debt repayment strategy. If you have confidence in your ability to have enough control over your spending habits so as not to fall into deeper debt, then these types of cards could be worth considering.
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The bottom line
The average APR on credit cards in the U.S. is close to hitting an all-time high of around 21%. But some cards already charge far higher, although they mostly target individuals with bad credit. It's important to have good credit if you're looking to get the lowest rates on your credit card. If you don't have a perfect score, you can still shop around and see what other lenders offer. By taking advantage of these offers and making sure you pay off your balance within the promotional period, you can avoid paying high credit card interest rates altogether.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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