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Nobody likes paying credit card interest, and as unsecured debt, credit cards will typically have higher interest rates than other types of loans such as a mortgage or a car loan. And unlike a mortgage or a student loan, credit card interest is never tax-deductible. Therefore, it can be very important to know if your credit card’s interest rate is too high.

How to Tell if Your Interest Rate Is Too High

According to the Federal Reserve Bank, the average interest rate for all credit card accounts is just over 12%, while the accounts that were assessed interest had slightly higher rates of between 13% and 14% over the last year. So if your credit card’s standard interest rate is below that amount, then you have a rate that is better than average, and if it’s higher, than your rate could be lower.

What Determines Your Credit Card’s Interest Rate?

There are many factors that can go into your card’s interest rate. First, there is the type of card that you are using. While some cards are designed to offer the lowest possible interest rate, others offer valuable rewards in the form of points, miles or cash back, but typically at the expense of higher interest rates. Furthermore, the cards that offer the lowest interest rates will only be available to applicants with an excellent credit history and the highest credit scores. 

In addition, many credit cards offer customers a range of interest rates, and the specific rate that you receive will be determined by your creditworthiness when you apply.(You can see where your credit currently stands by viewing two of your credit scores, updated each month, for free on Credit.com.) Most credit cards offer variable rates that can change based on movement of the Prime Rate: when the Federal Reserve Bank raised the Federal Funds Rate by a 0.25% in December of 2015, the standard interest rate for all credit cards with variable interest rates increased by a quarter of a percent.

Finally, you should be aware that most credit cards can have several different interest rates. The one that most people think of is the standard interest rate for purchases. But your card could also have different rates for cash advances and balance transfers. It can also have a lower, promotional financing rate that applies to new accounts for a limited time, and a higher penalty interest rate that can be imposed if you have missed payments.

Steps You Can Take to Minimize Interest

First, it’s important to note that nearly all credit cards allow you to waive interest charges completely when you pay your monthly statement balances in full and on-time. When you do so, you are using your credit card’s grace period to effectively receive an interest-free loan from the time you made your purchases up until your card’s grace period ends. The grace period is the time between your statement closing date and your payment due date. By law, this period, when offered, must be at least 21 days and many card issuers offer a 25-day grace period.

But if you are unable to pay your entire statement balance in full, then you should look to minimize interest charges by getting as low of an interest rate as possible. You can start by contacting your existing credit card issuer and just asking for a lower interest rate. If your card offers a range of interest rates, and your credit has improved since your account was opened, then you may qualify for an interest rate reduction. (Just keep in mind, this request may generate a hard inquiry on your credit report, since the issuer may need to pull your credit to see if you qualify for a lower APR — and that inquiry could ding your credit score.) 

Another strategy is to apply for a new credit card that offers a lower interest rate, and perhaps even a 0% APR promotional financing offer for new purchases, balance transfers or both. These offers allow you to open a new account and avoid interest charges during the promotional financing period, which can be as short as six months but are often for a year or longer. During this time, any payments you make will go directly to your balance, and you will not incur interest until the promotional financing expires. Just be aware that most credit cards will add balance transfer fee of 3% or 5% to the amount transferred.

By taking a closer look at the factors that contribute to your credit card’s interest rate, you can take steps to receive a lower rate and save money on interest charges.

Image: Georgijevic

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