APR rates vary widely, which can make it difficult to understand what exactly qualifies as a "good" interest rate.
Here's what to know about your card's APR and whether you should be considering alternatives.
Some Background Info on Interest Rates
Credit cards primarily use APR (annual percentage rate) as the way interest is calculated. The way APR works is that instead of adding a base percentage rate to the principle, interest is collated into a yearly rate to represent the total interest someone would pay on a debt over the course of a year.
APR tends to be more expensive than normal interest rates; however, unlike say a home loan, you have the option to pay off a substantial amount of debt within a relatively short span of time, potentially paying no interest at all if you pay your credit card bill on time every month.
Additionally, there are some other things worth considering that make credit card interest unique.
APR Can Vary Substantially, Even for People Using The Same Card
You've probably noticed that credit card offers tend to reference APR in terms of ranges, rather than individual numbers. The reason for this is that the exact interest rate a card holder has to pay will be determined by a wide array of factors, but typically credit history, income, and a borrower's relationship to a financial institution are the most important.
Why this is relevant is not just because your card's APR can vary a lot, but because what classifies as a "good" APR is going to be different for each credit card applicant. If you have a very low credit score and limited income, then getting a card with 20% could be classified as "good," whereas it would be considered "bad" if you had a high, steady income and pristine credit.
Some Types of Cards Inherently Have Higher Interest Rates
Not all cards are created equal when it comes to assessing interest rates. Some cards, due to their nature, have more robust APRs than others due to risk and operating costs.
For instance, company-specific credit cards tend to have lower interest rates when compared to general-purpose credit cards because a company will be able to make a large profit through purchases, while cashback cards almost always have higher interest rates because it ends up collectively paying for the cashback rewards.
The quality of an interest rate will ultimately depend on what kind of card you're looking at.
Negotiation Is Possible
Especially if you have some sort of rapport with a financial institution, you might be able to negotiate a good interest rate for a credit card.
Credit card applications take into account very broad information about an applicant's ability to pay back loans, but there are a lot of personal, but nonetheless important, details left out for the sake of expediency. Calling up a credit card company and explaining your financial situation might provide an avenue through which you can achieve a lower interest rate, regardless of what your initial qualifications might seem to warrant.
So What Rate Is Most Appropriate?
As mentioned previously, a good interest rate will depend heavily on a variety of factors, but, generally speaking, 14% APR or less is considered to be an ideal target point.
14% in monthly terms, rounds out to be roughly 1.17% per month. If your credit card balance is $100, then your interest payment for that month will only be about $1.17, which is a low, acceptable amount from a financial perspective.
Of course, 14% is rare and is usually only reserved for people who have exceptional credit, so it's probably above most people's ability to get.
More realistically, something in the ballpark of 20% or less for people with modest credit should be expected. For those with extremely low credit scores, 33% is not an unheard of number for APR being charged, so anything lower than 30% or so would be considered good, although it's always imperative to find a rate as low as possible.
Getting The Best Card for You
Credit cards are tricky financial instruments and calculating how they fit into your personal life can be nightmarish. That being said, there is a framework out there for determining if credit cards are for you and what APR is most appropriate.
