Navigating the world of credit cards can be daunting, with enticing bonuses, special offers, and rewards competing for your attention. However, when you're carrying a balance, finding a credit card with the best interest rates becomes crucial.
According to Experian, a leading credit reporting agency, the average American held a credit card balance of $5,910 in 2022. Securing a credit card with an APR lower than this average can significantly reduce your costs and help you clear your debt more efficiently.
Understanding the different types of APRs is essential for making informed comparisons and finding the best credit card rates that align with your financial goals.
What constitutes a good APR for a credit card? The APR, or annual percentage rate, serves as a standard metric for comparing the cost of credit, representing the interest and fees charged over a year.
In recent years, credit card APRs have seen a substantial increase. In 2021, the average APR across all cards stood at 14.60%. Fast forward to August 2023, the average APR surged to 21.19%.
But why does this increase matter? Let's illustrate with an example: Suppose you have a $5,000 credit card debt, and your card mandates a minimum payment of 2.5% of your balance, amounting to $125 per month.
With a 14.60% APR, it would take you 55 months to pay off the debt, with a total repayment cost of $6,774.42.
However, if faced with the same balance but a 21.19% APR, your monthly payment would increase to $138. Consequently, you'd be in debt for 58 months, paying a total of $7,996.58. The higher rate would result in $1,222.16 more in interest payments.
Finding the best credit card rates can translate to substantial savings and expedited debt repayment. Currently, any card offering an APR below the national average of 21.19% can be considered to have a "good APR," providing a stepping stone toward financial security and freedom.
Different Types of Credit Card APRs
When discussing credit card APRs (Annual Percentage Rates), most people think about the purchase APR, which applies to buying goods and services. However, it's crucial to be aware of other APRs too:
Balance Transfer APR
A balance transfer can be a savvy strategy for accelerating debt repayment and reducing costs. It involves moving the balance from one credit card to another with a lower APR. The balance transfer APR is the rate applied to the transferred balance.
Typically, balance transfer APRs mirror purchase APRs. Yet, some issuers provide special promotional APRs for balance transfers, offering a limited period with a lower rate to pay off debt.
Cash Advance APR
With a credit card, you can withdraw cash from an ATM, effectively borrowing against your credit limit. The cash advance APR is applicable to these withdrawals and usually carries a higher rate than the purchase APR. For instance, many cards impose rates of 29.99% or more on cash advances.
Penalty APR
Credit card issuers may raise your card's APR to the penalty rate if you miss payments or if your bank returns your payment due to insufficient funds. The penalty APR is typically considerably higher, often reaching 29.99% or more, and can persist indefinitely.
Introductory APR Offers
Cards with introductory APR offers provide new cardholders with a low APR, often 0%, for a set period, such as six to 18 months, on balance transfers or purchases. After the promotional period ends, the regular purchase APR takes effect.
For instance, the Citi Simplicity® Card offers new cardholders 21 months at 0% APR for balance transfers and 12 months at 0% APR for purchases. Once the promotional period elapses, a variable APR of 19.24% to 29.99% applies.
These offers afford you time to chip away at your debt or finance significant purchases without accruing interest.
Comparing Credit Card Rates
Now that you're aware of the typical rates and the various APRs that can come into play, you can embark on the journey of finding a new credit card.
When evaluating your options, it's prudent to examine each card's Schumer Box. The Schumer Box is a standardized table included in every credit card's rates and fees disclosure. Mandated by the CARD Act of 2010, card issuers must provide the Schumer Box alongside disclosures of essential terms.
Here's a glimpse of what you can expect to find in a Schumer Box,
It's important to note that you only need to concern yourself with the purchase APR if you maintain a balance. If you consistently pay your statement balance in full by the due date, the card issuer won't levy any interest charges. Consequently, some individuals don't mind if their card boasts a higher-than-average APY if it offers valuable benefits or rewards; interest doesn't accumulate since they always clear the balance in full.
The APR only becomes relevant if you intend to carry a balance into the subsequent statement period when making a purchase or paying off existing debt.
The Best Credit Card Rates
To secure the best credit card interest rates, you'll need good to excellent credit, indicating a score between 670 and 850. To achieve this, focus on the fundamentals:
Timely Payments: Your track record of making on-time payments holds the greatest sway over your credit score. Ensure you pay at least the minimum amount due by the statement due date for all your bills.
Maintain Low Balances: A lower credit card balance is not only easier to manage but also beneficial for your score. A reduced credit balance indicates that you have more of your credit limit available, which can have a positive impact on your credit standing.
Limited Credit Applications: Each credit inquiry has the potential to lower your score by several points. While it may be tempting to apply for a loan to seize a discount at checkout, resist the urge. Only pursue a new credit card or loan when absolutely necessary, and when you're confident you meet the requirements, to minimize new credit inquiries.
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