You’re in the market for a new credit card. Indeed, there is no shortage of options. There are many factors to consider in picking one, but the annual percentage rate (APR) is one of the most important.
The APR for your credit card is applied as a yearly interest rate on purchases you don’t pay off in full. They vary greatly. Here’s what you need to know to find a good APR and keep your credit card working for you, not against you.
What Is an APR?
Think of a credit card’s APR as the price you pay for borrowing money.
If you carry a balance on your credit card beyond your “grace period” each month, you must pay interest on that amount. Your APR determines how much interest you pay. A higher APR means you pay more, while a lower APR means you pay less.
This is why it’s important to understand the APR rates imposed by your credit card company; your APR plays a significant role in the overall cost of your debt.
Types of Credit Card APR
Trying to read the description of APR rates in the fine print of your credit card statement can feel like reading an alphabet soup. Make sure you know each APR rate assigned by your credit card so that you can use your card in the way that generates the least interest.
Purchase or Regular APR applies to the balance you don’t pay off by the end of your billing cycle. If you make $600 in purchases in November but only pay $400 to your credit card, the remaining $200 will be assessed in the purchase APR rate.
Penalty APR only applies if you misuse your credit card by spending above your limit or making late payments. Some cards require steady minimum payments for at least six months before removing the penalty APR rate.
Introductory APR is a tactic many credit card companies use as a perk for becoming a new cardholder. You may receive a temporary 0% introductory APR, meaning you borrow money for free. This is an attractive feature, but it only lasts a few months!
Balance transfer APR applies when you move the balance of one card to another. This is a quick way to switch from a higher APR card to a lower APR card and consolidate your debt. Some cards offer introductory 0% balance transfer APR rates as well.
What’s a Good APR?
In their descriptions, credit cards rarely give a single regular or purchase APR; they usually indicate a range, like 13.74% – 24.74%. That’s because the APR on your card is based on your creditworthiness, as indicated by your credit score and history. You won’t know until you are approved for the card what interest rate you’ll get.
- The best APR rates are offered to applicants with strong credit. If you have an excellent credit score, like 800 or above, you can snag an APR as low as 13.74%.
- “Very Good” credit, 740-799, earns an APR of about 17% to 20%.
- “Good” credit, 670-740, generates an APR of 20% to 23%.
- “Fair” credit, 580-669, generates an APR of 22% to 25%.
- You may be denied a credit card if your credit falls below that, or you’ll be approved with a 25.99% APR or more.
Generally, anything below 17.57% is considered decent. Single-digit APRs do exist, but they’re very hard to find unless you’re a member of a credit union or willing to sacrifice all other perks in exchange for such a low rate.
How to Qualify for a Better APR
There’s no magic recipe to qualify for a better APR. It takes time and diligent financial decisions to improve your credit score. These tips will help you get there faster:
- Stay aware of your credit score
- Make all payments on time
- Keep your existing debt below 30% of the existing credit limit
- Don’t apply for credit cards and loans that will place hard credit inquiries
Your credit score can open or close financial doors based on what it shows. The good news, at least, is that credit scores are also resilient. You always have the power to improve your score and snag a lower APR by taking strategic actions to reduce your debt and improve your payment history.
Don’t wait to get out of debt! Read this: A Complete, Step-By-Step Guide to Get Out of Debt.