When looking to apply for a credit card, you will routinely see the term APR. We at GetDebit have a very strong philosophy that APRs should never even matter.
“Why is that?” you ask!
Simply put, you should never willfully carry an unpaid balance on a credit card (with the caveat of low or zero APR balance transfers). This is because the annualized interest rates you’ll end up paying will far exceed any rewards you might hope to earn with the given card. However, this discussion of APRs is still germane, since sometimes we are forced to carry balances (just like Sauron forces the ringwraiths to do his bidding), or are otherwise in a situation where paying interest (sadly) is unavoidable. With that understanding in mind, here is some important information about APRs that everyone should know:
What Is APR?
APR stands for annual percentage rate. This figure determines how much money in interest you will have to pay if you don’t pay your credit card bill in full each month. These days, it’s rare to see purchase APRs much below 10%, and the “normal” range is more like 10-20%. Every credit card has its own APR, so it’s a good idea to shop around before you decide which card to apply for.
New credit card holders may not be aware that if they carry a monthly balance on their account they will pay significantly more money back to the bank than what they originally charged. Not only will the cardholder be charged interest for the items purchased that month, but any amount that was not paid that month, including the interest, will be charged interest again. This is in addition to any fees or penalties that a bank may charge over the course of the account. This should only serve to further drive home the lesson: carrying interest-accruing balances on credit cards is a bad idea!
Read the contract and find out if the credit card company charges a fixed or variable APR. A fixed APR will stay the same for as long as the account is open, unless the lender provides written notification of a change within the specified amount time. A variable rate can change at any time and is based on how the interest rates are doing in general. Most APRs are set at the prime rate plus some amount (for example, plus 3%). The prime rate can be found in the business section of any newspaper or online and is the standard by which interest rates are measured. While you should prioritize finding cards with the best rewards first, if you come across two relatively similar rewards cards, then the APR can serve as the tie-breaker. Also note that nearly all credit cards these days are variable rate, and not fixed rate (if you know of a fixed-rate one, drop me a note!).
Hidden APR Rates
Again, it’s important to read the fine print on a credit card contract. There are some lenders that will charge different APR rates for different situations. For example:
- Many lenders have a low introductory APR period that expiries after a certain amount of time. This is typically 90 days to 1 years, though we’ve seen some promotions that run 15, 18 or even 24 months.
- Cash advances almost always have a higher APR than the standard purchase APR.
- The default rate for failing to make a payment on time, even if the cardholder is 1 day late, will cause the APR to rise. It is not uncommon to see default rates at 29.9% in today’s market. Needless to say, if you ever default by accident, and the APR jumps up to that level, then you need to immediately do everything in your power pay off the entire balance of that card.
- Any convenience check issued by the credit card company typically has a higher APR than when a purchase is made directly with the credit card.
The Good, Bad and Ugly: Finding Friendly APRs
The simple rule of thumb is the lower the APR rate is, the better. A good APR rate is the lowest rate you can find. Since interest rates fluctuate, what is considered a good APR will also change over time. People with good credit will be able to obtain lower APRs than people with bad or little to no credit. An average-ish APR these days is around 19.9%, while a good APR is probably closer to 10%. The best APR would be zero, which may be offered during introductory periods.
It’s hard to provide a specific number when discussing bad APR rates. If you are researching a credit card and find a card has a higher APR than other cards you previously looked at, then the higher rate is a bad APR. This could be an APR of upwards around 29.9% or more. Cards with rates this high should be set aside for emergencies only.