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Consumers shopping for a new credit card should pay attention to a wide range of details in the fine print. They’ll want to know all about the rewards they can earn for sure, but it’s also crucial to check on fees — including any annual fees that may be charged.
Another important detail to be aware of is your credit card’s APR, or Annual Percentage Rate. It’s easy to gloss over the information and think it doesn’t matter, but this could be a huge mistake if you plan to carry a balance.
What is credit card APR?
We mentioned already how APR stands for Annual Percentage Rate. This figure, which is shared as a percentage, indicates the amount of interest you’ll pay on your remaining balance provided you don’t pay your credit card bill in full each month.
When do you get charged interest on a credit card? You should note that interest begins accruing once your grace period is over. A grace period is the amount of time your card issuer gives you between the end of the billing cycle and your payment due date. Interest isn’t charged on new purchases during this time provided you paid your credit card bill in full the month before.
The thing is, the term APR can be surprisingly hard to understand. While “annual percentage rate” implies that interest is charged on credit card balances on an annual basis, interest accrues daily on balances carried beyond your due date. Also note that, if you don’t pay your balance in full each month, interest begins accruing on new purchases from the day you make them.
Why your credit card APR is a big deal
If you are someone who tends to carry a balance from month to month, you’ll want to pay attention to your credit card’s APR. You may think a few percentage points won’t impact your finances in a big way, but compound interest can really sneak up on you if you’re not careful.
Considering that the average household reportedly carried $6,929 in revolving debt in 2018, understanding APR is crucial! If you’re curious what we mean, look over the following chart that shows the monthly payment, repayment timeline required and total interest charges that individuals would face if they made only the minimum payment on that amount of debt at various APRs.
|Minimum monthly payment||Repayment timeline||Total interest charges|
|$6,929 at 5.9% APR|
|$6,929 at 14.9% APR|
|$6,929 at 24.9% APR|
Note: Figures assume 3% minimum monthly payment with a minimum payment amount of $25.
Remember that this chart shows how much you would have to pay — and how long you would pay it — if you made only the minimum payment each month. If you’re curious how much interest you’ll pay on your credit card balance if you only make the minimum payment considering your balance and APR, you should play around with this Credit Card Payoff Calculator.
Also note that these numbers could improve if you paid more than the minimum payment on your credit card bill at any given time. While compound interest ensures you pay interest on your credit card balance every day it’s not paid off, the opposite is also true. Paying down your balance faster can have a domino effect on your debt since it reduces both the amounts you owe and the amount of interest you pay every month.
Does APR matter if you pay on time?
While we’ve certainly sounded the alarms to warn you of the negative impacts of high APRs, you may not need to care. What is credit card APR to someone who pays off their balance each month and never carries debt? It’s probably inconsequential, because:
- Your balance has been paid in full by your due date, so there’s no balance for interest charges to accrue on.
- Your credit card’s grace period ensures that interest isn’t charged on any new purchases you make. This means that, each month you pay your balance off in full by your due date, you get to start over with a clean slate interest-free until your next due date.
This is exactly why many consumers who pursue credit card rewards don’t care much about their credit card’s APR. If you’re going to pay your credit card balance in full each month without fail, the APR doesn’t matter much because you’ll never pay it.
Escape high interest rates with these tips
If you’re just now figuring out that your credit card’s APR is causing you to struggle, rest assured that there are steps you can take to remedy the situation. These strategies can help you save money on interest and pay down debt faster:
Make more than the minimum monthly payment
Every dollar you pay over your credit card’s minimum payment goes directly toward your balance. Strive to pay as much as you can toward your debts each month to reduce interest costs and pay off debt at a faster rate.
Transfer balances to a 0% APR credit card
Some credit cards known as balance transfer credit cards or 0% APR credit cards let you transfer balances and switch from high interest rates to 0% APR for up to 21 months. While you may be required to pay a balance transfer fee (3% or 5% of your balance is common), this fee can be well worth it thanks to interest savings.
Stop using credit — at least for now
If you want to save yourself from the worst consequences of high interest credit card debt, you should stop using credit! Stop adding to your debt load and focus on paying off debt instead.
Improve your credit score
Since credit card APRs are typically based in part on your creditworthiness and may be higher if your score isn’t great, take steps to improve your credit score now. The easiest ways to boost your credit score in a hurry include paying all your bills early or on time, paying down debt to decrease your utilization and refraining from opening or closing too many cards.