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Credit cards are known to often have high interest rates compared to other types of debt. And with recent rate hikes by the Federal Reserve, variable annual percentage rates (APRs) on many credit cards have started to climb even higher.
Credit card issuers generally don’t have to notify you when the APR increases on a variable account. As a result, your credit card debt could be costing you more money than it was a few months ago without you even realizing it.
If you’re looking for a new credit card, you may also face higher APRs. But the good news is that there is a loophole built in when it comes to credit card interest. When you pay off your statement balance before the end of your account’s grace period each month, you can enjoy the benefits of a credit card without incurring additional interest charges.
However, data from the Federal Reserve shows that half of all credit card holders have carried a balance at least once in the past 12 months. So if you think you might not be paying off your entire statement balance each month, it’s probably in your best interest to find the lowest possible interest rate on a credit card account.
What is the average credit card interest rate?
Credit card interest rates are often on the move, with varying rates that can go up and down over time. The most recent data from the Federal Reserve reveals that credit card interest rates (on accounts that charged interest) were 16.65% in May 2022. In May 2022, the average interest rate for credit cards increased slightly from 2021 to 15.13%.
Yet the Federal Reserve has raised the federal funds rate five times so far in 2022 (as of October 12, 2022) in an effort to fight inflation. And further increases are expected to occur throughout the year.
Reports indicate that credit card issuers have already started raising rates for new customers and existing cardholders. So when the Federal Reserve releases an update to average credit card interest rates for the third and fourth quarters of 2022, those numbers will likely reflect a sharp rise as well.
What are the different types of credit card interest rates?
Credit card interest rates come in three types: variable, fixed and promotional. Here’s an overview of each type of credit card interest rate and how they work.
Variable interest on credit cards is the most common way credit card companies use to charge customers. With a variable APR, a credit card issuer bases the interest you pay on a benchmark rate or index like the prime rate plus an additional spread.
Banks and other financial institutions look to the federal funds rate (set by the Federal Open Market Committee, aka the Fed) when setting the prime rate and other index rates. So, indirectly, a higher or lower federal funds rate could trigger an increase in your own variable credit card APR.
Say you open a variable interest account based on the prime rate — the bank’s margin is 10% and the prime rate is 4.75%. In this scenario, the APR on your credit card would be 14.75%. If the prime rate increased to 5%, however, your APR should increase to 15% in response.
Although less common, it may be possible to find a credit card that has a fixed interest rate that does not adjust up and down with the prime rate or other index. But it is important to note that there are certain situations where the card issuer may be able to adjust the interest rate on a fixed credit card.
In accordance with the CARD Act of 2009, a credit card issuer may be able to adjust your fixed interest rate in the following circumstances.
- You are 60 days or more late with your minimum payment.
- You have completed a hardship agreement or debt management plan.
- You failed to follow through on a hardship agreement or debt management plan.
- For any reason with 45 days written notice prior to the date of the increase.
As you can see, a “fixed” rate may not be so permanent after all. But if you are still interested in this type of credit card account, you may need to seek out such offers from local banks and credit unions. Most major credit card issuers have moved away from this type of interest structure. And those who offer fixed rate credit cards often charge higher interest rates.
Promotional interest describes an APR temporarily lower than the regular interest rate on a credit card account. For example, a card issuer may offer a 0% APR on new purchases to attract new customers. Another credit card company may offer a low or 0% APR on balance transfers, sometimes for new customers and some existing cardholders.
If you are taking advantage of a promotional offer on a credit card, it is important to know when the low or 0% APR will expire. Your best bet is to try to pay off the entire balance before the end of the promotional interest period. Otherwise, the card’s regular APR could kick in and start costing you more money.
Note that even with an APR of 0%, carrying a balance on a credit card can impact your credit score. When you don’t pay off your entire balance, your credit utilization rate increases. And a higher credit utilization ratio could negatively impact your credit score.
How to find the interest rate on a credit card?
Before you apply for a new credit card account (or any type of financing, for that matter), it’s a good idea to gather some information. You will want to review the APR that card issuers offer and compare those rates to others. Other details you may want to consider include annual fees, credit card benefits, rewards or cash back details, etc.
There are several ways to find out the APRs offered by credit card companies and compare them to each other.
- Visit the card issuer’s website: Card issuers will disclose the APR range available to approved applicants on different credit cards.
- Use a comparison site: Forbes Advisor, for example, makes it easy to compare the details of the best credit cards available, including the APR ranges for those accounts.
The final APR that a credit card issuer offers you will be based on a number of factors, in particular your credit score and your credit history. Again, if you pay off your statement balance in full by the due date each month, you probably won’t have to worry about interest charges.
What is a good interest rate on a credit card?
In general, you might consider a credit card interest rate to be “good” if it is close to or below the national average. Yet your definition of a good credit card APR may be different from what the next person considers a good deal.
Consider the following scenario. You’ve worked hard to rebuild your credit and earned a fair credit score. With your hard work, you may have the opportunity to qualify for credit cards for fair credit. However, if you keep working to improve your credit score over time, you could eventually put yourself in a position to possibly qualify for credit cards for good or even great credit.
Credit card companies and other lenders tend to reserve their best deals (e.g., low interest rates, low fees, attractive rewards, etc.) for consumers with good credit. to great. It can therefore be useful to check your credit score and credit report, find out where you stand, and compare the credit card offers you are likely to currently qualify for.
How to lower your credit card interest rate
Most credit card interest rates are not set in stone. Not only may your credit card company have the right to adjust your interest rate, but you may also find ways to lower your credit card interest rates.
Below are some ideas that might help you reduce the annual percentage rate on your credit card.
- Ask for a lower interest rate: Many people don’t realize they can call their credit card issuer to ask for a lower interest rate. If you have good credit and a solid payment history with the company, you may have a better chance of having your application honored.
- Consider opening a new account: If your current credit card company is unwilling to budge on your APR, you might consider taking your business elsewhere. And if you have a balance in your existing account, a balance transfer credit card could help you save money and possibly pay off your debt faster.
Credit card interest rates tend to be high compared to other types of financing, even if you have good credit. So if you’re currently struggling with high credit card balances, finding ways to pay off your debt quickly could make a significant difference to your budget and overall financial well-being.