When you’re choosing a credit card, one factor that may influence your decision is the card’s Annual Percentage Rate, or APR â€” otherwise known as the interest rate.
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If you know you’ll be carrying a balance over multiple billing cycles, a good interest rate is important because it reflects the interest rate assessed on your credit card debt.
On the other hand, if you pay your credit card bill in full and on time each month (and don’t anticipate any major purchases you can’t pay off in one billing cycle), the interest rate might not be the most important factor when choosing a card.
The Board of Governors of the Federal Reserve System provides consumer credit data, which for Q3 2016 showed an average credit card interest rate of 12.51% (13.76% for accounts assessed interest).
Ultimately, whether or not you receive a good interest rate depends a lot on you: your spending habits, your debts, and your ability to make payments on your credit card. Understanding how credit card interest rates work can help you be a better credit consumer.
How Was My Interest Rate Determined?
Your credit card’s interest rate is determined by a variety of factors, some of which are within your control, and some of which aren’t.
Lenders offer different interest rates, so it helps to shop around to see which rates are the most attractive to you. Generally, the more rewards a card offers, the higher the interest rate. If you don’t carry a balance and earning rewards is important to you, a higher interest rate could be worth it.
Your credit score also affects the interest rate you’re offered. This is the part you have some control over. If you want to be offered more types of credit cards, with more attractive features and interest rates, aim to raise your credit score to the good-to-excellent range.
Read the fine print when you apply for a credit card, and again as you review your credit card statements. Most credit card interest rates can vary when the Prime Rate adjusts. The Prime Rate is an interest rate that is three percentage points above the federal funds rate, which is set by the Federal Reserve Bank.
Tips to Lower My Interest Rate
It pays to shop around when you’re looking for a new card, to identify a good interest rate. Some lenders will offer you a 0% introductory interest rate for the first 9 to 12 months of card membership, giving you a chance to pay off a balance without owing interest. Others offer reward bonuses or discounts with certain retailers.
Here’s a valuable tip: If you pay your credit card bill in full and on time every month, then the interest rate on your credit card doesn’t matter. Why? Because as long as you pay your balance in full by the due date, you’ll never owe any interest or pay any late fees. If this is how you use your credit card, then you should shop for a card with the best rewards rather than the lowest interest rate.
If you do carry a balance, as many users of credit cards do, try to pay more than the minimum every month. If you’ve established a long history of using your card responsibly and would like to lower your interest rate, it may be possible to get a lower interest rate from your lender. However, keep in mind that all credit card issuers and lenders have different requirements for card holders and even a good credit history does not guarantee you will receive a good interest rate.
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You can also ask for a credit limit increase, which â€” if you don’t use this as a chance to spend more â€” can lower your credit utilization ratio and help boost your credit score. When in doubt, see what your credit card company can offer you.