Fixed Vs Variable Rate Credit Cards
Low interest credit cards come in two varieties: fixed rate credit cards and variable rate credit cards.
The difference between them is pretty simple â a fixed rate stays the same while a variable rate can change based on two key factors: 1. A bankâs current prime rate and 2. your credit score. When it comes to low interest cards, most banks offer either fixed rate or variable rate options but not both.
Each card type has its own unique advantages.
The benefit of fixed rate credit cards is that theyâre far more straightforward. Once youâre approved for the credit card, youâll know exactly what interest rate youâll get â down to the percent â and it wonât fluctuate regardless of shifts in the bankâs prime rate or your creditworthiness. Fixed rate credit cards are also far more likely to come paired with limited-time balance transfer promotions you can use to consolidate debts on previous credit cards and pay off at a fraction of the rate.
The advantage of a variable rate credit card is they could potentially land you a rock-bottom interest rate , but as long as you have excellent credit. The downside is you might get stuck with a higher rate if your credit score isnât great.
What Is The Average Apr For A Credit Card
The national average interest rate on cards was 14.58% in early 2021. This figure continually changes as new offers hit the market. Also, different card deals come with varying APRs.
Low-interest cards have typical credit card interest rates of 12.91%, while bad credit cards have an APR of 25.30%. Finally, the applicants FICO score also affects the interest rates on card deals. So, those with an excellent score get rates of about 13.04%, while those with poor history get APRs of 25.30%.
Interest And Apr: A Simple Definition
Most credit cards come with an interest rate. Simply put, this is the price youll pay for borrowing money.
For credit cards, interest is typically expressed as a yearly rate known as the annual percentage rate, or APR. Though APR is expressed as an annual rate, credit card companies use it to calculate the interest charged during your monthly statement period.
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Why Rates On New Card Offers Are All
Most U.S. credit cards are tied to the U.S. prime rate, which is directly influenced by the Federal Reserves benchmark interest rate, the federal funds rate. When the federal funds rate changes, the prime rate typically changes by the same amount.
Lenders are free to set APRs on brand-new cards as they wish and technically arent required to change the APRs when a cards base rate changes. Historically, most lenders do revise the APRs they advertise when the cards base rate changes.
Thats what happened in the spring of 2020. After the Federal Reserve slashed rates by a point-and-a-half in March 2020 in response to economic softening from the coronavirus pandemic, nearly all of the issuers tracked weekly by CreditCards.com with the notable exception of Capital One lowered new card APRs as well. That, in turn, caused the national average card APR to plummet to its lowest point since 2017.
Since then, most new cards included in the weekly rate report have continued to advertise the same APRs they had in the spring of 2020. As a result, the national average card APR has hardly budged for more than a year, remaining within a rounding distance of 16% since April 2020.
But if the Federal Reserve does increase its benchmark interest rate next year, as currently projected, then most credit card offers are likely to follow suit. Current credit cardholders will also see their rates climb, causing their debt to become much more costly to carry.
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Interest Rates For Different Types Of Credit Cards
The average credit card interest rate depends on the type of card you hope to get. The difference between the cards with the lowest APR and those with the highest APR is nearly 12%. Meaning, users of some cards pay significantly lower fees on owed balances than the rest.
If you carry balances of $1,000 on your card with an APR of 13%, youll pay $130 in fees. Those with a credit card whose APR is 24%, by contrast, will pay $240. This difference is considerable and quickly adds up, especially for people who often miss payments.
Average Credit Card Apr At Us Commercial Banks
The latest data from the Fed shows that the average credit card interest rate charged on all accounts by U.S. commercial banks is 14.54%. Moreover, on accounts assessed interest, the figure increases to 17.13%.
Interestingly, while the U.S. 2-Year Treasury interest rate has decreased by 18% since Q1 2010, U.S. commercial banksâ average credit card interest rates on all accounts and accounts assessed interest have increased by 2% and 17%, respectively, during that same timeframe.
Even more striking, the U.S. 2-Year Treasury interest rate has decreased by 53% since Q4 2019. However, U.S. commercial banksâ average credit card interest rates on all accounts and accounts assessed interest have changed by -2% and +1%, respectively.
As a result, lower interest rates across the U.S. Treasury curve have done little to ease the burden on credit card borrowers.
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What Is The Difference Between Fixed Rate And Variable Rate Credit Cards
When youre comparing low interest credit cards, youll notice that there are two types, fixed rate credit cards and variable rate credit cards.
A fixed rate low interest credit card has the same interest rate throughout the year, while the variable rate low interest credit card has a fluctuating interest rate. This variation depends on two important factors, one being the banks current prime rate and the second being your credit score. If you have a low credit score , you may not be able to take advantage of some of the interest rate discounts that come with the variable rate, low interest credit card.
- Fixed rate credit cards – The benefit of fixed rate credit cards is that youll know what interest rate youll be charged every billing cycle. The rate of interest wont be affected by the banks prime rate or your creditworthiness. Fixed rate credit cards usually come with limited-time balance transfer promotions you can use pay off your existing credit card debt.
- Variable rate credit cards – The advantage of holding a variable rate credit card is that you can get a very low rate , but this usually only comes with excellent credit. The disadvantage is that you might be stuck with a higher rate if your credit score isnt great or if the banks prime rate increases.
If you have a credit score lower than 670, stick to a fixed rate, low interest credit card.
Interest Rates And Debt To Income Ratio
Card issuers offer different interest rates to borrowers because of the differences in each financial profile. One metric used to measure a borrowers ability to repay is the Debt to Income Ratio . The DTI is calculated by adding up a card applicants outstanding obligations and then dividing by his or her income.
The resulting percentage is used to estimate the potential default to the lender for borrowers with similar DTIs. The cards interest rate is a reflection of that risk factor. The greater the risk, the higher the interest rate.
While individual borrowers may differ on their ability to repay credit, card issuers also rely on the concept that borrowers with similar credit scores will tend to exhibit similar payment behavior. For example, the lower a persons credit score, the more likely that he or she may default on a loan, thus the interest rate would be higher.
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Historic Interest Rates By Card Type
Some credit cards charge even higher average . The type of rate you get will depend in part on the category of credit card you own. For example, even the best travel credit cards often charge higher rates than basic, low-interest credit cards. Since 2007, CreditCards.com has calculated average rates for various credit card categories, including student cards, balance transfer cards, cash back cards and more.
Target Your Debt By Apr
Even if your creditors agree to reduce your rates, you will still spend money each month on high interest charges as long as you have credit card debt. The only way to avoid interest charges on high APR credit cards is to start a billing and end billing cycles with a zero balance. If you pay off your charges in full every month, high APR wont be a problem.
If youre concerned about APR now, its probably because you carry balances over from month to month. In this case, you need to implement a debt reduction plan. You streamline your budget to maximize the money you have, then target debts for elimination by APR.
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Average Credit Card Interest Rate
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In August 2020, the average credit card rate was 16.43%, according to the St. Louis Federal Reserve.
With a rate of 16.43% and a balance of $4,000, youll be charged $54.77 in interest each month.
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How To Evaluate Aprs
As of May 2021, the average APR charged for credit card accounts that incurred interest was 16.30%, according to the Federal Reserve.
But not all credit cards are created equal and some will be more expensive to carry a balance on than others. For example, a rewards credit card with benefits and perks is likely to have a higher APR than a balance transfer credit card.
As of May 2021, the average APR charged for credit card accounts that incurred interest was 16.30%, according to the Federal Reserve.
And different transactions purchases, balance transfers and cash advances may have different APRs on the same card. Theres even sometimes a penalty APR for late payments. These rates are spelled out in the , so be sure to review them.
If a low APR on purchases is your priority, you might also consider researching options from credit unions, where interest rates on credit cards tend to be lower than at major banks.
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Choose A Credit Card That Doesnt Charge A Penalty Rate
Setting a reminder in your phone can help you track your payment due dates, but if that doesnt work, consider a card that doesnt have a penalty rate: the Apple Card, Citi Simplicity, or any of Discovers credit cards.
Your credit score will still be impacted if your late payment is reported to the credit bureaus.
How We Calculate Apr Averages
We gather purchase and transaction APR information from current credit card terms and conditions. If a credit card APR is posted as a range, we first determine the average of that range, then use that number in our overall average rate calculations. We do this so the statistics are true averagesnot skewed toward the low or high end of a spectrum.
The overall average APR in this report is an average of the average APR in each category we track: travel, cash-back, secured, business, student, and store cards.
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How To Avoid Or Reduce Credit Card Interest Charges
If you want to avoid paying credit card interest charges, or minimize the amount of interest youll pay in a billing cycle, here are a couple of things you can do.
- Pay your credit card bill in full. Credit card companies generally give you at least a 21-day grace period between the purchase date and the payment due date. If you pay off your balance in full and dont have any cash advances outstanding, you wont be charged interest on new purchases made during this interval.
- Pay a little more than the minimum. If you cant pay off your full balance, consider paying off as much as you can to avoid late fees and reduce the overall balance thats subject to interest. The minimum payment is typically up to 3% of the outstanding balance. Anything you pay over this minimum will further reduce your interest charges.
What Is The Default Rate
Because of the names, the penalty rate is sometimes confused with the defaultrate. The credit and loan industries use the default rate to measure the number of credit cardholders and loan borrowers who are late on payments. This rate considers credit cards that are past due but haven’t been charged-off, accounts discharged in bankruptcy, and mortgages and auto loans that are more than three months past due.
The default rate can be used to measure the health of the economy. Rising default ratesmore borrowers being late on their credit card and loan paymentscould mean the economy is experiencing difficulty. High mortgage default rates mean an increase in home foreclosures could be on the way.
The chart below illustrates credit card delinquency rates from 1991 through 2020:
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Other Average Credit Card Interest Rates
The average rates discussed above are so-called regular APRs. They apply to purchases and balance transfers under normal circumstances. But there are several other kinds of interest rates you should be aware of.
Here are the other average credit card interest rates:
- Purchase Intro APR: 0% for 11 months Usually 0%, this promotional rate lasts for a limited amount of time before the regular APR kicks in.
- Balance Transfer Intro APR: 0% for 13 months Usually 0% and sometimes offered for the same length of time as the purchase intro APR, this promo rate applies to balances transferred from another credit card or loan.
- Penalty APR: 25.57% Youll only see this interest rate if you fail to make your minimum payments.
- Cash Advance APR: 20.73% You can use your credit card like a debit card to get money from an ATM. But interest will start accruing immediately, and youll be hit with a hefty fee.
0% Intro APR Length Over Time
Average Cash Advance and Penalty APRs
Calculating Apr: A Step
How do you calculate credit card interest? Ah, the magic question. Heres the answer in step-by-step fashion that may remind you of your high school math class:
Steps to calculate credit card interest:
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Is It Important To Have A Good Apr
But if you’ll need to carry a balance on your credit card, then using a credit card with a lower APR can save you money on interest charges. Just keep in mind that the cards with the lowest APRs won’t typically offer you competitive rewards for spending or other premium benefits. So you have to weigh the value of having a card with a low APR against the opportunity to receive other rewards and benefits to determine how important a low APR is to you.
How Does Credit Card Interest Work In Canada
This article is by Paul Murphy, our VP and financial literacy expert with 15+ years of investment and banking industry experience.
If youve ever floated a balance on a credit card, youve likely asked yourself: how does credit card interest work in Canada?
The basics seem simple. You borrow money from the credit card company. If you dont pay it back, you are charged monthly interest.
But there are many factors, especially if you are in credit card debt, which makes it very important to understand how credit card interest.
For example, what if you only pay half the balance back? How is the interest calculated then? Or, what about new purchases? Do they accumulate interest right away?
Most people dont know that credit card companies actually charge interest on a daily, not monthly or yearly, basis. This compounds each day and you wont touch the principle until you pay down the interest. And there begins the debt cycle.
I want to explain how credit card interest works in Canada. My hope is that youll see that it can be extremely dangerous to your financial future.
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