Credit cards are simultaneously a boon and curse. While they help you pay for items when cash isn’t available, they also cause issues when you don’t pay the owed balance. For instance, you accrue interest payments along with the principal.
What Is Interest?
The SoFi website states that interest is the amount a credit card owner pays to borrow money. Calculation of the value is a percentage of the principal sum. For a credit card, the amount is related to its remaining balance.
How is Interest Calculated?
The U.S. government sets interest rates through the Federal Reserve (the Fed). They regularly meet to review the country’s economic state. It’s through these statistics that the Fed decides to raise or lower the rates.
Consumer industries like credit card companies use this information to set their interest percentages. These are higher or lower than the base value. How much you pay depends on a few factors:
- Current Income
- Employment Type
- Credit Score and History
- Past Credit Card Usage
Credit Card Interest Rates
Credit cards calculate interest to borrow funds on an annual percentage rate (APR). You use their money to pay a vendor. In turn, the credit card company pays the merchant and requests a return of funds from you.
On-time balance payments aren’t generally subject to APR interest. It’s usually applied when there’s a remaining card balance after the statement due date. Nevertheless, some cards charge an APR for usage even with a zero balance.
Current Credit Card Interest Rates
What is the average credit card interest rate? As of this writing, the Federal Reserve data shows it to be 16.44%. The value has increased two percentage points from 2017.
Experts believe the average rate will continue increasing due to the fight against inflation. In the spring of 2022, the Fed announced a .75% rate hike, the highest since 1994. Experts believe more increases are in the future if the inflation rate doesn’t decrease.
Rates are higher for credit card owners with subprime credit scores below 620. Those with fair numbers pay 20.40% APR. Credit card holders with poor credit scores pay close to 22% interest on their credit cards.
How to Lower Your APR
The quickest way to lower your APR is to get your finances in order. Pay your balances off on time for all your bills. Regularly review your credit report for outstanding issues. Reach out to debt collectors to make payment agreements. Further, call the credit reporting agency if you feel an entry is incorrect.
Avoid getting a credit card if you have issues. If the company deems you a high risk, they’ll charge the maximum APR possible to minimize its losses. Wait until your credit score is 620 or above. If you do this, you have a greater chance of reducing your APR and obtaining a higher limit.
Think hard about why you need a credit card. It should be for emergencies instead of impulsive purchases. Consider this before filling out an application.