According to the American Bankers Association, there were 365 million open credit card accounts in the U.S. at the end of 2020. That means 7 in 10 Americans have a credit card – that’s more than 185 million adults, each of whom carries an average of 4 cards and over $5,000 in credit card debt.
To help you better manage credit card usage and potentially keep your credit card debt under control, Andrews Federal has an expert guide to everything you wanted to know about credit card interest rates.
Full disclosure about credit card interest
- Simply put, credit card interest is a fee you pay when you borrow money from your financial institution to complete transactions.
- APR (Annual Percentage Rate) is the most common terminology used to describe credit card interest
- Credit card interest rates are how the lenders make their money
- There is more than one type of APR. You will also be charged an APR for balance transfers, cash advances, and more.
- Andrews Federal offers a variety of competitive Visa® credit cards. Choose to earn flexible rewards on every purchase or enjoy a low-interest rate that keeps credit simple.
It’s a proactive approach to learn how credit interest rates affect your credit card usage. Although the APR is expressed as a yearly rate, the actual interest calculations are based on a daily rate, which is your annual interest rate divided by 365.
For example, you may have a credit card with an APR of 18% annually, which works out to a daily rate of 0.049% (18% divided by 365). Now, if you made a $300 card purchase on the first day of the month, you would receive a $0.15 interest charge, resulting in a total balance of $300.15 the next day. Since interest charges are assessed daily, if you made no other card purchases over the next 30 days, you would end up with a balance of $304.50, including principal ($300) and interest charges ($4.50), for the month.
Some people may feel that an 18% interest rate is not such a big deal – what’s so bad about 15 cents per day interest charge on a $300 purchase? However, suppose you step back and consider that the yearly interest charge on the typical U.S. credit card balance of $4,000 – calculated at 18% APR – results in annual interest payments of around $720. So, you can see how interest charges affect your bottom line.
One card – multiple interest rates
Believe it or not, there are up to six different APR interest rates that may be tied to your credit cards, depending on how you use them.
- Introductory – This is a limited-time promotional APR offer that entices consumers to open a new card. An introductory APR can be applied to purchases and balance transfers for a limited time (typically 6-12 months) and can be much lower than conventional interest rates.
- Purchase – This is the APR applied to your monthly credit card purchases and is the interest rate we tend to think of when comparing credit card rates or considering the value of a new card. Your purchase APR varies based on the type of card you have, but a recent national average shows a 16.15% APR across all types of credit cards.
- Balance Transfer – APR charged for the money you move or transfer from an old credit card account to a new credit card account. Currently, the national average Balance Transfer APR is 14.03%.
- Cash Advance – APR applied if you use your credit card to access cash. Currently, the national average Cash Advance APR is 25.43%.
- Penalty – A penalty APR is typically triggered when you are 60+ days late with a payment and can range from 20%-35%. Rest assured, that Andrews Federal does not charge a penalty APR.
Having a credit card or two can come in handy – whether you need to cover an unexpected expense, grab a rental car, or establish a reputable credit history. But financial experts note that credit cards should be used with a healthy dose of self-discipline.
Try these credit card hacks to save
Don’t max out your card
Your credit card has an available balance that you can use and then payback. Savvy credit card users try not to use more than 20% of the available balance. Managing your balance keeps your debt under control, improves your credit score, and protects you from expensive interest charges.
Pay your entire balance every month
Experts agree that the best way to manage credit card debt is simply this – pay off your balance every single month. Paying your entire balance off will altogether avoid any interest charges. Plus, if you have a credit card that offers rewards, you will continue to rack up the benefits while avoiding interest payments.
Or, pay more than the minimum monthly payment
If you can’t pay off your entire balance at the end of the month, at least pay more than the minimum monthly payment. It may be tempting to pay the minimum amount due but, this can hurt your overall financial wellness. Paying more than the minimum payment can boost your credit score and reduce the time it will take to pay off your debt.
Lower your APR
Most Americans have multiple credit cards, some with a higher-than-average APR. A credit card with a lower interest rate could save you money. Consider shopping around for a credit card that better fits your needs.
Reduce your overall debt
If you racked up credit card debt at some point in life, you’re not alone. No doubt that debt is costing you a hefty amount every month. So, consider consolidating your debt to reduce monthly payments. Credit card debt can be consolidated into a personal loan or to another credit card with a lower rate.
When exploring options to reduce your overall debt, use a credit card interest calculator to determine your monthly payments.
The bottom line
Credit cards require some discipline and the ability to pay the monthly bill (preferably in full). Get the most from your credit card by choosing one the suits your needs.