Credit cards are one of the most widely used forms of payment these days. With the lure of rewards and the ease and convenience of payments, many turn to their credit cards first when making purchases.
While you may have originally chosen the credit card you have because of a low rate, many factors can go into receiving that rate. You may not even realize how much you are paying to use your card and, as a result, may be paying more than you intended.
Before you swipe your card, it’s essential to understand the ins and outs of credit card rates, including what to consider before choosing which card to use.
Understanding APRs on Credit Cards
Lenders, such as your credit card company, will almost always list an APR – Annual Percentage Rate. This is how much you’ll pay in interest to use the credit card on an annual basis. Knowing your APR is a quick way to gauge your credit costs. The lower your APR, the less you have to pay, and vice versa, of course.
While you may think you know your credit card’s APR, you could be surprised once you do a little digging. The two most common types of interest rates for credit cards are variable rates and fixed rates.
Variable Rate: A variable rate means that the APR you receive can vary and fluctuate with the economy. This means that depending on what the economy is doing, your rate could go up unexpectedly. Variable rates are the most popular credit card rates today because they help protect the lender from drastic economic changes.
Most credit card rates are based on what is known as the “prime rate.” The Federal Reserve partly determines this number in their setting of the federal funds rate. The prime rate that financial institutions charge is typically around 3% over the federal funds rate. So, if the federal funds rate is 0.25%, the prime rate will be 3.25%.
If you have a variable rate credit card and the federal funds rate increases, your credit card rate will likely increase as well. So, if your current rate is 14.95% APR and the Federal Reserve raises the rates to 0.50%, your new variable credit card rate would change to 15.45% APR.
Some lenders are a little sneakier in how they promote their rates. They may say Prime plus 14.95% APR. Using the 3.25% Prime Rate again, your APR would actually be (14.95% + 3.25%) 18.2% APR.
Fixed Rate: Fixed-rate credit cards are a little harder to find nowadays. With a fixed-rate credit card, the rate remains the same for the life of your card - no matter what the economy is doing. So, if the prime rate increases, it will not affect your credit card’s interest rate.
Finding Your APR
To find out what rate you are paying on your credit card, look at your credit card statement. You can find your current APR within your statement and determine whether it is a variable or fixed interest rate. If you are having problems finding this information, give your credit card company a call, and they should be able to answer all your questions on interest rates.
What’s a Good APR?
Generally speaking, a good credit card rate ranges from 10% to 12% or less. Rewards cards will typically have higher interest rates than cards that do not offer rewards. Always make sure you read the fine print when opening a credit card. Some banks and store-sponsored credit cards have rates up to 29% APR in exchange for their rewards!
If you’re positive you can pay off your balance in full each month, a rewards card will provide you with an easy payment method plus beneficial perks. However, if you tend to carry a balance on your credit card, it’s always in your best interest to opt for the lowest-rate credit card you can find.
It’s worth noting that most credit unions are not legally allowed to charge interest rates over 18% APR. If your current credit card rate is over that threshold, you should definitely consider transferring your balances to a lower-rate credit union card.
We’re Here to Help!
By understanding all the ins and outs of credit card rates, you’re in a better position to choose a credit card that will work best for your situation. It’s important to remember that credit cards, despite the lure of rewards programs, are still loans – and must be managed responsibly.
If you would like to learn more about our credit cards or are interested in a balance transfer, we’re here to help.