Credit card interest rates are a significant cost for consumers who carry balances, and understanding the annual percentage rate (APR) is crucial for responsible credit card use. The APR represents the interest charged on outstanding balances and can substantially impact the total cost of borrowing. As of , the average credit card APR hovers just below 20%, but rates vary considerably based on creditworthiness and card type.
Recent data indicates a long-term trend of rising credit card APRs. According to CBS News, the average interest rate on a commercial credit card is nearly 21%, almost double the rate seen a decade ago. This increase underscores the importance of securing the most favorable APR possible.
What is a good APR for a credit card?
Determining a “good” APR depends on individual circumstances and the prevailing economic conditions. While a 0% APR is the most desirable, these introductory rates are typically limited to a promotional period. Beyond that, a rate at or below the national average is generally considered competitive. Currently, that means aiming for an APR below 20%, though even matching the average can be acceptable, particularly if the card offers substantial rewards or benefits that offset the interest costs.
Bankrate notes that even a card with an APR matching the national average can be a decent option if it comes with valuable rewards, bonuses, and perks. However, consumers should still strive for lower rates whenever possible, as credit card interest remains higher than most other forms of credit.
How are credit card APRs determined?
Credit card APRs are not arbitrary; they are closely tied to several key factors, most notably the prime rate. The prime rate, in turn, is influenced by the Federal Reserve’s target federal funds rate range. Issuers then add a profit margin – typically between 12% and 13% – to the prime rate to determine the APR offered to consumers.
The type of credit card also plays a role. Cards offering premium rewards and benefits often come with higher APRs, while those designed for individuals with limited credit history or those seeking to improve their credit scores may offer slightly lower rates. A consumer’s credit score is a primary determinant of the APR they receive.
How can you qualify for a better APR?
While some factors influencing APRs are beyond an individual’s control, proactive steps can be taken to improve creditworthiness and increase the likelihood of securing a lower rate. Maintaining a strong credit profile is paramount.
NerdWallet recommends the following strategies:
- Pay bills on time, consistently: Payment history is a major component of credit score calculations.
- Maintain low credit utilization: Keeping the amount of credit used relative to total available credit low demonstrates responsible credit management.
- Avoid applying for multiple credit products simultaneously: Each application triggers a “hard inquiry” on your credit report, which can temporarily lower your score.
- Monitor your credit report regularly: Identifying and correcting any errors on your credit report can help improve your score.
By focusing on these areas, consumers can increase their chances of qualifying for a more favorable APR, ultimately reducing the cost of borrowing and maximizing the benefits of credit card usage. A good credit score is the most powerful tool in negotiating a lower APR.
Understanding the interplay between the prime rate, credit score, and card type empowers consumers to make informed decisions and navigate the complexities of credit card APRs effectively. While the current average APR sits near 21%, diligent credit management and strategic card selection can lead to significant savings over time.
