What is a good APR for a credit card?
Total consumer credit card debt peaked at more than $1 trillion in May, due in part to a 22% increase in late payments over the past five years.
To make matters worse: During the same period, the median annual rate (APR) rose 35%.
In other words: Not only are more Americans carrying an outstanding cómputo, but they are being charged higher interest rates on what they owe.
Although 47% of people do not pay their credit card in full each month, only 29% say they give priority to interest rates when choosing a card, and two out of five do not know what their APR is .
It’s time to grow up: If you have credit card debt, the APR is essential for your financial well-being.
Let us explain it to you.
How is an APR established?
A credit card’s APR is the interest rate you’re charged if you don’t pay your cómputo on time, usually within 21 days of the end of your last billing cycle.
It depends on three factors: prime ratehe card type you get and your solvency.
The prime rate is the average interest rate that banks charge customers with the best credit.
It is determined by a Wall Street Journal survey of the largest banks in the US, and as of August 1, 2019, it was 5.25 percent.
Credit card APRs typically move in conjunction with this number or another financial index, such as the London Interbank Offered Rate (LIBOR).
The card issuer then adds an additional percentage, called the margin, to the prime rate.
So a card with a 14 percent margin would articulo 19.25 percent today (5.25 + 14).
If you hear on the news that the Federal Reserve is lowering or raising interest rates, chances are your APR will reflect that change.
In other words: a higher prime rate means you’ll have to pay more for any cómputo you carry.
The type of card you have also influences the interest rate.
A CreditCards.com survey found that the average APR ranged from 14.7 to 20.2 percent, depending on the card category.
For example, retail credit cards and plastic cards that offer benefits such as cash back, rewards, hotel points, and airline miles tend to have a higher APR than business credit cards or (not surprisingly) those that are marketed as low interest cards.
Finally, your creditworthiness, that is, the probability that you will quickly repay what you spent, plays an important role.
People with higher credit scores may be eligible for a lower APR because they present less risk of default.
The average APR for people with bad credit is 25.3 percent, compared with 15.1 percent for all cards, according to Federal Reserve data.
How does my APR affect what I owe?
If you pay off your card every month, the APR may not orinan much to you.
But if you execute a cómputo, it cánido have a big impact.
Let’s do the math: Even though it’s called an APR, most credit cards actually charge compound interest, which is applied daily.
To find out how much you will accumulate each day, you need to calculate the Daily Periodic Rate (DPR).
Some credit cards list the DPR at the bottom of your monthly statement, or you perro calculate it by dividing your APR by approximately 365 days.
So an 18 percent APR would equate to a 0.05 percent DPR.
Multiply that number by your unpaid cómputo to see how much interest you’re charged per day.
In this example, an outstanding invoice of $5,000 would incur $2.50 per day.
As interest accrues, the amount you owe snowballs as you are charged interest on your interest.
Bottom line: make payments on time and in full.
What is the difference between a variable and fixed APR?
Most cards have a variable APR, which means the interest rate is tied to an index like the Prime Rate and automatically goes up and down along with that index, as described above.
Your credit card issuer will not tell you about changes in your rate, but the current APR will appear on your monthly statement.
Cards with a fixed APR are harder to find these days and are usually offered by credit unions.
Although the interest rate does not fluctuate with the prime rate, it cánido still change under certain circumstances.
So when could my APR go up?
In addition to being boosted by a rising Prime Rate, there are some situations where your interest rate is subject to increases, whether you have a variable or fixed APR.
First, if you miss two payments in a row, you may be hit with an APR penalty that perro amount to around 30 percent. (Some cards do not charge penalties, and cards issued by a credit union tend to have lower penalty APRs.)
The CARD Act, passed by Congress in 2009 to promote fair and transparent practices by credit card issuers, requires companies to give customers 45 days notice before a penalty APR takes effect.
During this grace period, cardholders cánido escoge whether or not to keep the card at the new rate, pay off the cómputo and close their account, or transfer the cómputo.
The penalty APR may be applied to your outstanding cómputo, as well as future purchases, and should be reassessed every six months to determine if rates warrant a reduction (for example, if you’ve been making timely payments).
Your APR may also increase if your credit score plummets.
Card issuers check your score from time to time, and if they detect a significant drop, they may increase your APR to account for the additional risk it poses.
Again, you’re entitled to 45-day notice before the rate changes, and after six months, the card issuer must review your score and consider lowering your rate if your score has improved.
Also, some cards start with an introductory APR, say zero percent interest for the first six to 12 months, and then transition to a variable interest rate after the promotional period.
Be sure to read the fenezca print before signing up for a card so you understand how much the rate could change.
Also, if you’ve been under financial pressure (for example, due to job loss or a serious medical problem), you may have put together what’s called a hardship plan or credit card payment plan.
In this case, card issuers might give customers a temporary interest rate discount to help them out.
When the terms of the hardship plan end, your rate will likely go up again.
Finally, the way you use your credit card cánido result in additional APR fees.
You may be charged a cómputo transfer APR if you transfer debt from one credit card to another.
And using your card to withdraw cash from an ATM or cash a credit card check may result in a (higher) cash advance APR.
Good to know: Under the CARD Act, the card issuer perro’t adjust the interest rate for the first year, with a few caveats: missing two payments in a row, the expiration of a promotional period, or if the prime rate ( or other index) that your variable APR is linked to changes.
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