Credit Card Interest Rates

Introduction

If you use a credit card, you may have wondered how the interest rates are calculated and how they affect your balance. Credit card interest is the fee you pay for borrowing money from the card issuer. It is usually expressed as an annual percentage rate (APR), which represents the yearly cost of borrowing money using the card.

However, credit card interest rates are not fixed. They can vary depending on the type of transaction, the market conditions, and your credit score. Here are some key points to help you understand credit card interest rates better:

• Purchase APR:

This is the interest rate that applies to the purchases you make with your credit card. It can be either variable or fixed, depending on the card. A variable purchase APR changes with the prime rate, which is influenced by the Federal Reserve’s monetary policy. A fixed purchase APR stays the same unless the card issuer changes it. The average purchase APR of credit cards tracked by Investopedia was 23.74% as of June 2023¹.

• Balance transfer APR:

This is the interest rate that applies to the balances you transfer from one card to another. It can also be variable or fixed, and it is usually higher than the purchase APR. Some cards offer a promotional or introductory balance transfer APR, which is a lower rate for a limited period of time. This can help you save money on interest if you pay off your balance before the promotional period ends.

• Cash advance APR:

This is the interest rate that applies to the cash you withdraw from your credit card at an ATM or a bank. It is typically the highest APR on your card, and it may also incur additional fees. Unlike purchases and balance transfers, cash advances do not have a grace period, which means you start accruing interest as soon as you withdraw the cash.

• Credit score:

Your credit score is a numerical representation of your creditworthiness, based on your credit history, payment behavior, debt level, and other factors. Credit card issuers use your credit score to determine your eligibility for a card, as well as the interest rate they will charge you. Generally, the higher your credit score, the lower your interest rate, and vice versa. You can check your credit score for free from various sources, such as credit bureaus, banks, and websites.

Knowing how credit card interest rates work can help you manage your debt and avoid paying unnecessary fees. To reduce your interest charges, you should try to pay your balance in full every month, or at least pay more than the minimum amount. You should also compare different cards and look for the ones that offer the lowest interest rates for your needs. Finally, you should monitor your credit score and take steps to improve it, such as paying your bills on time, keeping your credit utilization low, and disputing any errors on your credit report.

Sources:

¹: Understanding Credit Card Interest – Investopedia ²: What Is APR? Understanding Credit Card Interest Rates | Credit Card News & Advice | U.S. News ³: What are credit card interest rates? | Lloyds Bank ⁴: How Is Credit Card Interest Calculated? – NerdWallet