Whether you’re an individual or a small business owner, having a credit card is beneficial because it gives you instant access to credit when you need it. Once you have established your creditworthiness to creditors, your line of credit may increase over time giving you a financial lifeline that you can count on.
How Does Your Credit Score Affect Your Credit Card Interest Rate?
The interest rate you pay on your credit determines the extra percentage you have to pay back for the credit you borrowed. A credit with low interest is easier and faster to repay because of low-interest charges added to your monthly payment.
However, creditors offer varying interest rates on credit cards depending on your credit score. As a rule, the higher your credit score, the higher your eligibility for a low-interest rate and higher credit limit.
Below is general information on the applied credit card interests on different credit scores according to CFPB’s Consumer Credit Card Market Report.
|Credit score category||Effective interest rate|
|Deep Subprime (579 or lower)||21.0%|
|Subprime (580 – 619)||20.5%|
|Near Prime (620 – 659)||19.0%|
|Prime (660 – 719)||16.5%|
|Super Prime (720 or greater)||13.5%|
Why Do Interest Rates Matter on Credit Cards?
You may think that if you pay your credit card balances in full every month then the interest rate doesn’t really matter. This may be true, but as you go along your credit journey and apply for several other loans, you will eventually succumb to making partial payments on your credit card balances. Therefore, it is important to get the best deals on your credit cards because:
- It will save you a lot of money on interest payments, especially on purchases that will be paid off for a period of months or years
- Low monthly payments are easier to pay off, enabling you to pay more money in advance
- You’ll be able to maintain a good credit utilization ratio because you’re able to pay off your balances much quicker
What is Considered a Good and High APR on Credit Cards?
Annual Percentage Rate or APR on credit cards vary and apply differently depending on the type of balance; you can find the APR details most specific to your credit card in your contract.
According to the Federal Reserve’s data for the first quarter of 2020, the average APR across all credit card accounts is 15.09%. Credit union credit cards, as a type of secured credit card, have lower APR ranging from 10% to 15%.
Here is a look at the different types of APR and their average rates:
This is considered as your regular APR that is applied to all your credit card purchases. The average variable rate is between 13.99% to 23.99%
Cash Advance APR
This is the rate applied the moment you borrow cash from your credit card. It is typically higher than your regular APR at 23.68% and has no grace period. Cash advances are not considered a good deal so only use it when in dire need.
Balance Transfer APR
This is the rate applied when you transfer a balance from one card to another, from a high rate to a lower rate. The average rate ranges from 13.99% to 18.99%. Most of the time, the balance transfer rate also serves as the introductory APR and is lower within a certain period before it increases towards the regular rate.
This is the rate applied to balances when you violate certain terms and conditions of the credit card. It is usually the highest at 20% to 35%.
What may be considered a high APR on credit cards is that which ranges between 20% – 25% and are usually given to people with bad credit. Store credit cards tend to have higher APR as well at 28.24% variable. You’ll find store cards to offer more rewards, perks, or discounts in lieu of high rates.
How to Lower Interest Rate on Credit Card?
If you maintain credit cards with balances that don’t seem to reduce in amount even with diligent payments, then know that one of the culprits is the high-interest rate. You don’t have to keep up with this; instead, find ways to lower your interest rate on your credit card with some proven strategies:
- Raise your credit score
A good to high credit score allows you bargaining power with your credit card company on lowering the interest rate.
- Improve your debt-to-income ratio
Banks look at a well-proportioned income and debt that is around 36%. When yours is at this level, then you can confidently negotiate for lower rates.
- Check and monitor your credit report
Look for any wrong information on it and find ways to correct it.
- Consider applying for credit union credit cards
You may be required a deposit in lieu of lower rates.
- Transfer your balance
You save money on the lower rate of the transfer as well as the regular rate.
- Look for better rate offers
Try not to be misled on introductory offers or rewards. Look for one that will save you more money to maintain.
- Negotiate with your bank
Once you have done everything to gain a bargaining position, go and talk to your bank to lower the interest rate on your credit card.
Always aim to acquire credit cards with low-interest rates because that will not only help you manage your accounts well, but also save you money in the long run.