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Understanding Credit Card Interest Rates & APR

Updated October 2022

Credit cards are a convenient way to shop online and in person. There is a lot of discussion regarding credit card APR, and whether or not it matters to consumers. The short answer is, it depends on your financial habits. If you often carry a balance, your credit card APR should matter to you. If you pay your balance off in full every month, your credit card APR is less of a concern. This article will provide you with helpful information pertaining to credit card interest, APR, and why it should matter to you if you are a balance carrier.

What Is Credit Card APR?

Before we discuss why credit card APR matters to balance carriers, it’s important to define what exactly APR is. APR stands for Annual Percentage Rate. In simple terms, APR is the annual cost of borrowing money. APR is the yearly interest rate charged on loans. At the end of the month, if you pay off your ending balance by your due date then you owe no interest. If you carry a balance on your credit card from one billing cycle to the next, then the interest (APR) is applied to your outstanding balance. 

Credit Card and Shopping Card

APR Types

  • Purchase – The APR applied to purchases made on a credit card
  • Cash advance – Higher than regular credit card purchases, the cash advance rate is the cost of borrowing cash from your credit card.
  • Penalty – These rates are applied when you violate the conditions of your card, like paying a due balance late. Penalty rates are the highest APR.
  • Introductory or promotional – These low rates are typically offered for a limited time, as a promotion for new or existing card holders.
Lower interest rates

How Can I Lower the Interest Rate on My Credit Card?

The APR applied to your balance is based on your creditworthiness, meaning your credit score determines the interest rate you pay. The higher your credit score, the lower your APR. If you find yourself with a high APR, working to raise your credit score can help you in more ways than one. 

Why Does Credit Card APR Matter?

The best way to explain why credit card APR matters to balance carriers is to provide you with an example. There are many calculators you can use to see how much credit card interest is costing you, and how much you could save by paying down your balances.

Example 1: Let’s say you keep a balance of $5,000 on your high-rate retail or bank credit card, and your APR is 25%. Using those figures…

  • Your current monthly interest charge would $104.17
  • Interest over 1 year would be $1,250.04
  • Your interest over 5 years would be $6,250.50

Example 2: Let’s say you keep a balance of $10,000 on your high-rate retail or big bank credit card, and your APR is 23%. Using those figures…

  • Your current monthly interest charge would be $208.33
  • Interest over 1 year would be $2,499.96
  • Interest over 5 years would be $12,499.80

The above examples show why APR should matter to you if you are a balance carrier. The good news is, you have options!

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