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What is a good APR and how does it affect credit card debt?

Learn to successfully navigate credit card APR.

Justin Cupler

Contributing Writer at Tally

February 27, 2020

Credit cards can be sharp financial tools when used correctly, but there are many factors to consider when dealing with them. Near the top of the list is the annual percentage rate (APR).

A credit card’s APR can have a huge impact on how much the card will cost you, so a low APR can save you plenty of money over time.

Below, we’ll dive into credit card interest rates and APR to determine what is a good APR and how you can get it.

What is APR?

Before talking about what is a good APR on a credit card and what is not, you must first understand what APR is.

APR is the interest rate your credit card charges each year on your balance plus any additional fees. This amount varies greatly between different credit cards and can even vary between cardholders of the same credit card. This is why it’s essential to know a good APR when you see it.

Where credit cards get their APR

Credit card companies don’t just pull their APR from thin air. It is a carefully calculated rate based on several other published rates. 

The prime rate, which is published by the Wall Street Journal, is the most widely used benchmark for setting APR. WSJ bases this rate on the federal funds rate, which is “the interest banks charge each other for overnight loans to meet reserve requirements,” according to Bankrate. The Federal Reserve sets the federal funds rate.

To be profitable, your credit card company adds a dozen or so percentage points to the prime rate and charges you that marked-up rate on your purchases each month.

What is a good APR?

woman holding help sign with head on table

A good APR is subjective. Someone with a 27.9% APR may see a 17.9% offer as a good APR. On the flip side, someone with a 15.9% APR credit card may be appalled at a 17.9% offer.

To make APR comparisons more objective, you must first look at the average credit card interest rate. The average APR on credit card purchases is 21.28% as of January 2020 according to The Balance. So anything below that would be a good APR and anything above that would be a not-so-hot APR.

When APR doesn’t matter

APR is important when considering a credit card, but it is not always a concern.

Since your credit card only charges you interest on balances you carry into a new billing cycle, you can avoid interest charges altogether if you pay off your full statement balance once you receive your bill.

A credit card you pay off every month can benefit your finances. Many financially savvy people use rewards credit cards to pay for their daily expenses, then pay off each statement. This allows them to earn the cash back or reward points each month without paying a penny of interest.

If you plan to pay off your entire credit card balance every month, you don’t need to overly concern yourself with APR.

How your credit score affects credit card APR

woman looking at credit score

Many things can affect your credit card APR, and they all center on your credit score.

Your credit score is your financial report card, and it’s where lenders and banks look to see how risky it is to lend you money. You have many credit scores, but 90% of lenders use the FICO model. In the FICO scoring system, your credit score can be anywhere between 300 and 850. A score of 300-579 is “very poor credit,” 580-669 is “fair credit,” 670-739 is “good credit,” 740-799 is “very good credit” and 800-850 is “exceptional credit.”  

If you have bad credit (generally the fair or lower tiers on the FICO scale), you’ll either be declined for a traditional credit card altogether or get a high APR. If you have a good credit score, you will qualify for cards in the middle of the APR pack. If you have excellent credit, you can land some of the best APRs available.

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Five key factors can help or hurt your FICO credit score:

  • Payment history accounts for 35% of your FICO scoring. A single missed payment can result in a double-digit drop in your credit score.

  • Credit utilization, which is the amount of revolving debt you have compared to your credit limit, makes up 30% of your credit score. For example, if you charge $300 to a credit card with a $1,000 limit, you are at 30% credit utilization. If your credit utilization creeps over the 30% mark, your credit score will start to drop.

  • The age of credit history shows the average amount of time you’ve had your accounts. For example, if you’ve had one credit card for 10 years and open a brand-new credit card account, your average age of credit will be five years. The older your credit is, the better. This category makes up 15% of your credit score.

  • Credit mix makes up 10% of your score and is based on the diversity of your credit report – the less diverse, the lower the score. For example, if you have 10 credit card accounts and nothing else, this may cause your score to drop. But if you also have a personal loan and a mortgage, your score may increase.

  • New credit and inquiries make up 10% of your FICO score. New credit is simply any new account on your report. New inquiries show up when you apply for new credit and a lender performs a hard pull on your credit to qualify you. Too many new credit accounts and inquiries can lower your credit score.

Negotiating your way to a good APR

Nearly everything in life is negotiable, and that includes credit card APR. Before you try to whittle down that credit card APR, you must first understand how cards divvy out their interest rates.

Fixed vs. variable APR

Many credit cards offer one fixed APR. These fixed-rate credit cards offer a single APR to all cardholders. Alternatively, they may place cardholders in APR tiers based on their creditworthiness. An example of these tiers would be 17%, 22% and 27%. The users with the best credit land in the lower tiers, while those with worse credit land in the higher tiers.

Another credit option is variable APR cards, which base their APR on the prime rate plus a markup percentage. These cards use your creditworthiness to determine the markup, which combines with the prime rate to determine your total APR. 

An added layer of complexity in variable APR credit cards is your interest rate will go up and down with the prime rate. For example, if your APR is 16% now, but the Federal Reserve raises its rate by 0.25%, your APR will shoot up to 16.25%.

Negotiating a lower APR

So while you agreed to these APRs when you signed up for your credit cards, they are not written in stone. You can sometimes call your credit card company and negotiate a lower APR.

Some credit card companies refuse to negotiate rates and typically offer the same APR to every cardholder. With a variable-rate card, though, your credit card company might negotiate. This is especially true if your credit score recently improved, qualifying you for a lower interest rate.

To negotiate your credit card APR, call the customer service phone number on the back of your credit card and tell the representative you’d like to speak about getting a lower APR. The representative will let you know if you can negotiate.

If the company is willing to negotiate your APR, emphasize how long you’ve been a loyal customer, your stellar payment history and any competing credit card offers you’re considering transferring your balance to.

Even if the company refuses to negotiate your APR, you can ask them if they can waive any past interest charges or annual fees. Some credit card companies will periodically waive these fees, so it’s worth a try.

Transferring to a good APR

If you can’t negotiate a better APR, you can transfer to a great APR. Let’s take a look at balance transfers and pitfalls to avoid.

Promotional APR

Credit cards always want new customers and will give you great promotional balance transfer rates to draw you in. In many cases, these rates are 0% APR for 12 months or more

While a balance transfer from a high-interest credit card to a 0% promotional APR seems perfect on the surface, there are a few factors to consider.

First, consider the transfer fee. Credit cards generally charge a 3% to 4% transfer fee on the balance you transfer to this 0% promotional APR. So, if you transfer $1,000 to a card with a 4% balance transfer fee, you incur a $40 fee.

That $40 may seem steep, but considering a credit card with a 17.9% APR would cost you $179 in interest over the course of a year, the transfer is likely a better deal.

Deferred interest

You must also consider what happens when the 0% APR promotional period ends. Will the credit card start charging interest after the promotional period expires, or is the interest deferred during the promotional period? If it’s the latter, you may get stuck with all that interest.

Deferred interest is the interest a credit card accrues during the promotional period, but you aren’t initially charged. However, if you end the promotional period with a remaining balance, the deferred interest is charged on that unpaid amount.

For example, if you transferred $1,000 to a card that deferred its 20% interest for 12 months and you left $500 unpaid after the promotion ended, you would get hit with a $100 interest charge.

If you take advantage of a deferred interest card, make monthly payments to ensure you pay off the transfer before the deferred interest hits your account. To help you avoid this deferred interest charge, you can always automate your credit card payment amounts that’ll ensure you pay off the balance before the deferred interest hits your account. 

Go land that good APR

what is a good apr: woman holding credit card and phone

With the question of “What is a good APR?” answered, you’re ready to evaluate your current credit card APR, a potential credit card transfer or new credit cards with confidence.

To sum up, you can find your current credit card’s APR on your monthly statement. When applying for a new credit card, it’ll disclose the APR range in the terms before or during the application process. You won’t know your final APR until your application is approved, but you can at least see the credit card’s APR range and decide if it’s a good rate.