Any savvy consumer knows that credit cards play an important role in today’s financial world. They offer convenience and a powerful tool to use in many situations. But just like any great product, credit cards can be misused. The smart credit cardholder understands how to get the best terms and when it is best to use a credit card.
Consumers love their credit cards. According to a recent Federal Reserve report, the average American adult with at least one credit card carries about $5,800 in credit card debt. In recent years this number has been steadily increasing. Americans’ total revolving debt, which is largely made up of credit cards, exceeded $1 trillion for the first time in 2018. One worrisome trend is that in the past year delinquency rates for credit cards are increasing. A credit card is considered delinquent when the holder is behind on a payment, a sign that the holder may have too much debt.
If you’re considering getting a credit card, there are some things to consider regarding APR. A few important questions to ask are: What is a good APR? What is an APR? How does your APR affect your monthly payments?
What is a Good APR?
An APR (Annual Percentage Rate) represents the yearly cost of the funds borrowed. For example, if you charged $2,000 on your credit card and your APR was 20%, you would be paying $400 each year on interest fees. The APR you pay on revolving credit affects your financial health in the following ways:
- It determines your minimum monthly payments on your debt.
- It affects your cashflow.
- It contributes to the final cost of every item you purchase.
- It can eat into your discretionary income.
The average APR rate for new credit card offers is 19.24%, while it stands at 14.14% for existing cardholders. Rates also vary depending on whether it is a business card, a student card or a store card. Most importantly, average rates for those with excellent credit (14.41%) tend to be much lower than for those with fair credit (22.57%).
If you don’t payoff every monthly payment for your credit card, it’s important to negotiate the best APR you can. A lower APR will reduce your monthly costs, often by hundreds of dollars. For example, that same $2,000 credit card balance with an APR of only 10% will reduce your annual costs by $200.
The Keys to Obtaining a Low APR
In most cases, what constitutes as a good APR is determined by your credit score. Your credit score is essentially determined by five main factors connected with your financial situation.
- Payment history: 35%.
- The amount owed on balances: 30%.
- Credit history: 15%.
- How recent new credit lines were opened: 10%.
- The type of credit lines used, such as mortgage, car loan and credit card: 10%.
The better your credit score, the lower APR rates you receive on all types of loans. Because a credit score is constantly changing, you can raise your score by making a few changes to your financial situation. This may take some time, but it is possible. Some of the most effective ways to improve your credit score include checking your credit report for errors, making all of your payments on time, opening a secured credit card and clearing up any collections on your record.
Unlike other types of credit, most credit cards come with a variable APR. This means that the credit card company can alter your APR if your creditworthiness changes. If your credit score declines, your APR will likely increase. On the other hand, if your credit score improves, you may be able to negotiate a lower APR. Your APR could also change due to the Federal Reserve raising the Prime Rate for loans.
The Steps for Getting a Low APR Card
It’s easy to apply for a new credit card, but always remember to evaluate the details of each offer. When getting a new credit card, consider the following:
- Is there an annual fee? If so, how much is it?
- What is the credit limit? Is this high enough for your needs?
- What is the APR?
- Can you consolidate other debt into this card?
- What paperwork is needed for approval? How long will this take?
If your credit is only fair, you may have to settle for a card that has an annual fee and perhaps a lower credit limit. You may also have to start with a higher APR on purchases.
The Advantages of Having the Right Card
There are other factors beyond APR to keep in mind when shopping for a new card. With the right card in hand you increase your purchasing power in several ways. If you carry a balance, a low APR means lower monthly payments.
It also allows you to pay off your balances more quickly. Not having to worry about an annual fee allows you to use more of your money to paying off your balance. A good credit card enables you to get on solid footing with your finances.
Life is all about making the most of your opportunities. A high APR on a credit card eats into your discretionary income, leaving you less each to spend on those items that make you the happiest. A credit card should work for you, allowing you the freedom to make sensible purchases without being punished through exorbitant interest payments. A good credit card in your wallet has the potential to improve your life in many ways.
Apply for Your Card Now
At Credit.com, it’s easy to find a card that is right for your situation. You can look up your credit score, compare cards, apply for credit cards online, and learn all about the best ways to manage your credit.