The cost of borrowing funds is on the rise (along with everything else) as inflation forces the Federal Reserve to raise its rate by 25-basis-points, the highest level in 15 years.
The average credit card interest rate hit 20.40% in November, up 3.75% from July, according to recent data from the Fed. This means the 35% of borrowers who carry a balance from month to month can expect a higher interest bill—especially if they have a variable rate.
It’s more important now than ever for borrowers to review their credit card APR to avoid unknowingly paying higher interest on their purchases.
What is credit card APR?
An annual percentage rate (APR) for a credit card is the yearly cost of borrowing funds from your card issuer and is sometimes referred to as the card’s interest rate.
But not everyone will pay interest on their credit card purchases. Interest is typically only charged on balances carried from month to month, says Rachana Bhatt, head of credit cards for PNC Bank.
In other words, you can avoid paying this additional expense by paying your bill in full each month—assuming you have no previous interest charges to pay off.
Your credit card may have a fixed- or variable-rate APR. With a fixed APR, your rate is locked in for a specific amount of time. An example of this is credit cards that offer a 0% introductory APR for a few months following the account opening.
On the flipside, a variable APR will fluctuate within a specified range that is tied to the Federal prime rate. Most credit cards have a variable rate.
What is a good APR for a credit card?
An APR is considered to be a good rate when it is at or below the national average, which currently sits at 20.40%, according to the Fed.
This means that a credit card offering a fixed rate lower than 20.40% or a variable rate with a maximum of 20.40% would be considered a good APR for the average borrower. It’s important to note that this percentage changes along with the Federal prime rate, so what is considered a good rate today might change in the future as the Fed updates its rates.
Having said that, comparing your APR to the national average is not a one-size-fits-all approach. Credit card issuers will typically take a holistic approach to qualifying you for an APR. This process considers not only the current economic state, but also what kind of card you are applying for—such as rewards and retail cards, which Bhatt notes tend to have higher rates—and your individual credit history.
For instance, in 2020 the Bureau of Consumer Financial Protection reported that borrowers with a super-prime credit score (above 720) have the lowest average APR of all credit score levels, whereas borrowers with a deep subprime credit score (below 580) have the highest average APR.
How to calculate your monthly interest based on your credit card APR
There is a step-by-step calculation to determining your APR, but you’ll need to do some light research before crunching numbers. You need to find your card’s interest rate (hint: It’s usually listed on your monthly statement).
Let’s say your APR is 20.40% with an average daily balance of $1,500 and no additional charges in a 30-day billing period.
Any unpaid balances on your credit card that are carried month to month are subject to accumulate interest on a daily basis. So, we have to first convert your annual interest rate to a daily periodic rate.
APR / Number of days in a year = Daily periodic rate
(20.40%) / 365 = 0.00056
Calculate how much interest is charged per day based on your daily periodic rate and average daily balance.
(Daily periodic rate) * (Average daily balance) = Daily interest charge
(0.00056) * ($1,500) = $0.84
Your interest charges for the billing cycle are determined by multiplying your daily interest charges by the number of days in the cycle.
(Daily interest charge) * (Number of days in billing period) = Interest for billing period
($0.84) * (30) = $25.20
3 ways to lower your credit card APR
If you’ve reviewed your credit card statement and noticed you are paying a higher APR than you would like, there are a few options to help you lower your rate.
Improve your credit
Qualifying for a credit card that offers a good APR goes hand in hand with having a good credit score. Luckily there are steps you can take to boost your score if you are in the process of building or rebuilding your credit.
Your credit score is largely impacted by your payment history, so building a track record of consistent on-time payments can help increase your score in as little as a few months, depending on your starting point. If you owe more than 30% of your credit limit, consider paying down your balances, since that is the second largest factor impacting your credit score.
Shop for a better rate
If you are in the market for a new credit card, you may be able to stave off these decades-high APRs by waiting until interest rates are on the decline to submit an application. But if you are in immediate need of funds, consider comparing several credit cards that suit your spending needs and weeding out the ones that charge the highest APR.
Keep a keen eye out for cards that offer a low or promotional 0% APR for a set time period after account opening, says Bhatt.
If you plan on carrying a balance from month to month, you may be able to delay paying interest on your purchases or avoid it completely by paying off the card in full before the introductory period ends. Bear in mind that eventually the card will return to its regular APR, so consider whether you are comfortable with this rate before applying.
Contact your card issuer
The process for requesting a lower APR on your credit card varies depending on your issuer’s policies. For instance, some credit card issuers may have a process in place to evaluate your account and automatically lower your APR without requiring you to contact them. Other issuers may not consider lowering your APR unless you directly request it.
If this is the case, you may be able to negotiate your rate by calling your issuer and requesting a reduction. Your issuer is under no obligation to accommodate your request, but borrowers with a long history of making on-time payments may have a better chance of reducing their APR than borrowers who recently opened their credit card and have not yet established their loyalty and credibility with an issuer.
The takeaway
Generally speaking, what is considered to be a good APR for a credit card is one that is at or below the current national average. This is contingent on the Federal prime rate and can vary significantly from year to year.
This one-size-fits-all approach neglects to consider that certain credit cards—like ones that offer generous rewards—tend to have higher APRs than cards offering basic perks. It also doesn’t take into account that each borrower has a different credit history, so what is a good rate for one person may not be for everyone.
