What is a good APR for a credit card? This is often the first thing people wonder about when browsing for a new credit card.
Few people actually know how APR is calculated, how you qualify for the best APR possible, and the different types of APR that might apply to your card.
In this article, we’ll cover how APR works and what you need to consider. This will help you get the best APR for your credit cards.
Here’s what we’ll focus on:
- What is APR?
- How is APR on credit cards determined?
- The average APR on credit cards
- How to have a good APR on a credit card
- Cards with higher APRs
- Cards with lower APRs
What is APR on a credit card?
Short for “annual percentage rate,” APR refers to the interest rate charged to borrowers or earned by investors yearly. APRs are usually expressed as a percentage. In simple terms, if the APR is 10% on a borrowed sum of $100, the principal you have to pay over one year should amount to $10.
APR is usually calculated by multiplying a periodic interest rate (for example, the interest charged per day/month) by the number of times interest will be charged per year. For example, if interest is charged on a daily basis, then the APR will be the daily interest x 365. If it’s charged monthly, it will be the monthly rate x 12.
This is the typical credit card APR definition used in the US, but it might be slightly different in other jurisdictions.
APRs may not include all costs of funds or fees associated with a financial instrument, such as a credit card. However, it is typically used as an easy-to-compare baseline for consumers when comparing credit cards, loans, etc.
How Is APR on Credit Cards Determined?
The multi-step process for calculating the APR you will have to pay according to your credit card transactions is fairly complex. It may also vary slightly depending on how your credit card provider compounds interest, your billing cycles, and any other special T&Cs that apply to that specific card.
In the US, most financial institutions base credit card APR on daily compounded interest, so we’ll use that as our guideline. You should be able to find the compound frequency for your card on its fee schedule.
Here is how you can calculate your APR payments:
- Divide the annual percentage rate for the credit card by the compound period to get the periodic rate. You’ll use this to determine how much you’ll pay on a particular balance each period. For example, if your APR is 20% on a daily compound period, then the answer would be 20% (0.2)/365 = 0.00055%.
- This is the hard part. You’ll have to calculate your average daily balance during the last billing period. That means tallying up your balance at the end of each day during the last billing period and then dividing that by the number of days. For our calculation, let’s say that we had an average daily balance of $500 over a 25 day billing period.
- Finally, you can calculate the total you owe from your credit card transactions over the last billing period. You do that by multiplying your average daily balance with your daily periodic interest rate and then multiply that by the number of days in a billing cycle. So, in our example:
$550 (average daily balance) x 0.00055% (daily periodic rate) x 25 day billing period = $6.85.
Most credit card companies implement a minimum APR fee that ranges from $1 to $5 or 1% to 5% of your balance.
It’s worth noting that different types of transactions may have different APR rates and these will all be calculated separately and then added together. So, it might not be that simple to calculate an average credit card interest rate, depending on how you spend.
According to the CARD Act of 2009, consumers are also allowed a grace period of 21 days after the close of the last billing period to settle their credit card balance and avoid paying APR.
Finally, you need to know whether you have a fixed or variable APR rate. A fixed-rate will very rarely change under special conditions throughout your ownership. However, a variable rate will fluctuate with the federal prime rate, leading to variable interest charges.
The Average APR on Credit Cards
Determining the average credit card APR is challenging. That’s because there are different types of APR for different types of transactions as well as the fact that credit card providers often tailor the APR to individual consumers based on their credit score.
For example, a credit card might come with an APR range of 14.99% to 22.99%. For exactly the same credit card, applicants with lower credit scores will get a higher APR while those with higher credit scores will get a lower rate within that range. According to the Federal Reserve, the average APR for credit cards in 2020 was 16.28%. Anything below this is considered a good credit card APR.
Special credit cards, such as credit builder cards, may also have especially low or high-interest rates.
As a rule of thumb, 13% tends to be the average low APR limit and 23% tends to be the average high limit. However, credit card APRs can range all the way from around 9% to 35%.
Types of APRs on Credit Cards
As mentioned, different APR rates may apply according to different credit card facilities. This may have a significant impact on your credit card expenditure depending on how you use your credit card:
Many credit cards offer a low introductory APR for the first year, meaning you won’t have to pay any interest on your credit card balance. This may apply only to certain types of transactions, such as payments or a balance transfer.
This is typically the main APR or “go-to APR” referred to when talking about credit card APR. It applies to your balance after you’ve made purchases or payments using your credit card.
Balance transfer APR:
This APR applies to your balance after having transferred money from your credit card balance to another account. This APR is usually the same or similar to the purchase APR.
Cash Advance APR:
You can get a cash advance from an ATM or in-person at the bank. You can find out what cash advance is here. Cash advances typically come with 1%-3% higher APRs than payments or balance transfers.
Penalty APR rates may kick in if you’re late on an APR payment, replacing the original rate for the outstanding balance. If you don’t settle your bill within 60 days, it may be applied to your credit card balance for up to 6 months.
How to Have a Good APR on a Credit Card
As you can see, APR rates depend on a number of factors. Before you can get a good APR, you need to know what’s a good APR for a credit card for your unique situation. APRs also aren’t set in stone and there are certain actions you can take to help secure the best possible APR for your credit card:
Fix your credit score:
Many credit card companies base your APR on your credit score and other financial risk factors. APRs determined this way can vary by as much as 10%, meaning it can have a significant impact on how much interest you’ll pay. Knowing how to fix your credit score is a crucial part of getting the best credit card deals.
- Compare different offers: APR rates and the terms associated with them may vary drastically from card to card. Applying for various credit cards and then comparing your offers is the best way to land a good APR for your credit cards. Even if you cannot get a much lower APR rate, you might find a better introductory offer or more suitable billing periods.
Make a payment plan:
To avoid higher penalty APRs, make sure you make payments on time. Some cards have autopay functions for this while credit builder cards allow you to ensure your credit card expenditure, making it nearly impossible to miss settling your balance.
Banks might periodically review your usage to adjust your APR. Having a lower credit utilization is a good way to prove that you’re a low-risk borrower and lower your APR rates for existing or new cards. However, the definition of a good credit utilization ratio depends on your income and type of credit card.
Monitor your credit report:
Regularly reviewing your credit score can help you identify and address anything that may negatively impact it. You can get a credit report for free from all three major credit bureaus.
Cards with Higher APRs
Although you understandably want the lowest APR possible, some cards have higher APRs for good reason. It may be that they are the only option for new credit card owners, individuals with low credit scores, or that they come with other benefits that outweigh their high credit card interest rates. Here are some high-APR credit cards you may want to consider:
First Access Card
This is a VISA credit card that doesn’t have strict credit score requirements to qualify for. As a result, the APR for both purchases and cash advances is at the high end of the spectrum at 34.99%. There is a minimum interest charge of $1 as well as a 21-day grace period to settle your balance. There is also a once-off $95 signup fee and a $75 annual account fee. Instead of a penalty APR, there is a flat $40 missed or returned payment fee.
This is another card you may qualify for if you have a credit score of under 600. It’s a free card with no application or annual account fees. That said, there is a high credit card interest rate with a purchase APR of 24.9%, a 29.9% APR for cash advances, and a minimum charge of $0.5. A penalty APR of 29.9% will apply if you are late with your payments and may apply to your account indefinitely.
First Premier Credit Card
This Mastercard is billed as a credit building credit card for those with no credit history or a low credit score. This Mastercard is available either as a secured or an unsecured card with a security deposit that covers you in case you don’t pay your balance. You also have a longer 27-day period to settle your balance. However, the APR is exceptionally high at 36% for all transactions with a minimum $1 charge. There are also variable signup and annual fees with a flat $39 charge for missed or returned payments.
Luxury Card offers a range of three premium Mastercards. Annual fees start at $195 with extra charges for additional authorized users. This makes it suitable as a family or business card. The high fees are compensated for with a superb rewards program. The annual percentage rate for this credit card is also acceptable at 14.99%, although cash advance APR is high at 25.24%, with a 0% low introductory APR for the first year. There are a 23-day payment period and a minimum charge of only $0.5.
Cards with Lower APRs
Generally, lower APR credit cards require higher credit scores to qualify for as they are aimed at low-risk borrowers. While not always the case, these cards are also typically best for those who spend more frequently and in larger amounts. These are all relatively good APR for credit card options:
Upgrade Visa Card
This is a no-fee credit card with credit lines of between $500 and $50,000. APRs start incredibly low at 8.99%, although you need to use the Autopay facility and have a line of credit under $25,000 to qualify for the lowest rates. The upper ranges are still relatively high with a maximum of 29.99%. Additionally, you earn up to an unlimited 1.5% cashback on your credit card payments when you settle your balance.
USAA Preferred Cash Rewards Visa Signature Card
If you want a good APR rate for a credit card, this card has an attractive APR of 11.9% to 25.9%, a 25-day period to settle your balance and no penalty APR or minimum interest charge. There are also no signup or yearly account fees associated with this card, making it almost completely free. To top it off, you will also earn up to 1.5% cashback on all qualifying purchases. However, your credit score should be in the good to excellent credit score range to qualify.
American Express Cash Magnet® Card
American Express has one of the best introductory APR offers with a 0% rate for the first 15 months, making it one of the best no-interest credit cards. After that, the ongoing APR rate is relatively low at between 13.99% and 23.99% (25.24% for cash advances). Holders can also look forward to a 1.5% cash back rewards program on all purchases as well as 0 account fees, although there is a penalty APR of 29.24%. You have a standard 25 days to settle your balance and avoid paying any interest.
Understandably, everyone wants the lowest APR possible when applying for a credit card. However, so many people get caught up in what is a good APR for a credit card that they forget that other considerations are equally important. To qualify for the lowest APRs, you sometimes need to make compromises regarding fees or terms.
You should always look at your own spending habits and balance that with a credit card’s APR offer to determine what is the best choice for you.
If you rarely have an outstanding credit card balance, for example, you can risk a higher APR for other incentives, such as cashback rewards or lower account fees. Now that you know what is a good credit card APR, you can do exactly that.
APRs can range anywhere from 9% to 35% with the typical range being between 13% to 23%. According to the Federal Reserve, the average APR in 2020 was 16.28%. Generally speaking, anything from 15% and below can be considered a “good” interest rate.
With little or no credit history, you will most likely only qualify for higher APR credit cards. Expect to have an APR of anywhere from 23% to 35%. With a credit building facility, you may have safeguards in place to ensure that you almost never pay interest.
Some credit card providers will occasionally review your APR. You can reduce your APR by paying balances on time and having low credit utilization. If you want to apply for a new card, correcting your credit score and shopping around for multiple offers will help you land a lower APR. It all starts with informing yourself about what is a good APR for a credit card in the first place.
Yes and no. If you ALWAYS pay on time, you may never have to pay interest at all. Credit cards have a minimum 21-day period to settle your balance without incurring interest. However, even just slipping up once could result in the permanent application of penalty APR, so it’s best to avoid late payments.