When applying for credit, one of the biggest differences between available offers is the annual percentage rate. The best APR is 0%, but very few people have income levels and credit scores high enough to qualify for this type of offer. While almost every credit account has an APR, this article focuses on credit cards. So, what is a good credit card APR?
What Are Credit Card APRs Used For?
Before delving into what counts as a good APR for you, take a look at why banks use them in the first place. The Consumer Financial Protection Bureau describes APR as the interest rates you pay for accessing your credit. However, you can avoid being charged interest by paying your credit card balance in full every month. Some cards may also have more favorable borrowing terms. This is especially common with store credit cards.
Unfortunately, not everyone can afford to pay off the full credit card balance every month. Some people forget. Because of this, almost half of Americans owe credit card debt. A National Public Radio article estimates that collectively, Americans owe almost $1 trillion to credit card companies. This is good news for banks because they rely on APR to make money. The higher the APR, the more money banks make. The lower the APR, the more money consumers save.
Who Uses Credit Card APRs?
Everyone who participates in the credit market uses APRs. This includes both organizations and consumers.
APRs are most important to lenders because it has a direct effect on the bottom line. APR is also a reflection of risk. The higher the calculated risk of someone defaulting on payments, the higher the APR.
Most consumers use APR as the biggest determining factor for choosing credit card offerings. This is especially important for consumers who know they may not have the means to repay the balance in full every month.
Accountants, wealth managers and financial advisors use APRs to advise clients on what credit card offerings to pursue. They may also use APRs to help clients determine what credit cards to prioritize paying off first, so they can save money on interest.
When Should You Use Your Credit Card APR?
Ideally, you never have to pay interest on any credit card balance because you never owe the bank for more than 30 or so days. However, there are some cases where taking the hit in the form of interest may be better than your alternatives.
You Need Cash
Not every bill can be paid with credit cards. Some companies insist on tying invoices to checking accounts. In some cases, you may not have the option to pay electronically at all. There are also instances where you may need cash for emergencies. In these cases, taking the interest hit may be worth it to free up cash.
You Plan To Invest
Credit card APRs are among the highest in the credit market. Generally, only personal loans and payday loans are worse. Experian estimates an average credit card APR of 14% to 15%. This can be difficult to out-earn with investments. However, if you have a much lower interest rate or a zero-APR introductory rate, it may be worth using up your credit so you can invest more of your cash.
An Example of Credit Card APRs at Work
Amanda’s bank gives her a credit card with a $10,000 spending limit and 0% APR for 12 months. At the end of the 12 months, she will begin to pay 15% APR on the remaining balance. Amanda has $10,000 initially set aside to purchase a car in cash.
She invests $5,000 in the stock market and buys a car from a dealership that accepts credit cards. Over the first year of investing, her $5,000 grows by 10% to $5,500. During that time, Amanda has also been treating her credit card as a car note and made monthly payments.
In the final month, Amanda had a family emergency and ended her 12 months with a balance of $834. The following month, the bank charges her 15% on the remaining balance, bringing her total to $959.10. Amanda pays the balance and still makes a profit of roughly $375 by deciding to use her credit.
Steps for Evaluating Credit Card APRs
Ultimately, the credit card APRs you qualify for depends on more than just the credit card companies or even the specific card. Companies may determine what they offer you by your income, its source and your credit score.
These steps can help you evaluate what is a good APR for you, regardless of your financial situation:
- Get a copy of your credit report and dispute discrepancies.
- Access your credit score and find areas for improvement.
- Use an aggregate website to shop around for credit cards, such as NerdWallet or CreditKarma.
- Review the details of each offer beyond just the APR.
- Check online reviews from customers and check the card ratings.
- Apply for one or two credit cards with a high chance of approval.
What is a quick and easy way to improve my credit score?
If you have existing accounts, pay down the balance. Doing so reduces your credit utilization, which can give your score a bump.
What is too high for a credit card APR?
This depends on your financial situation and how the specific offer compares to others you may receive. However, a good rule of thumb is that anything over 19.99% is too high.
How can I avoid paying interest on my credit card?
Review the terms to see when the bank starts charging interest. Automate your payments so that you never miss at least the minimum payment. Finally, consider making more frequent payments throughout the month.
Want more advice on how to manage your credit card debt? Check out our blog.