A lower interest rate will cost you less over the life of a loan and credit card purchases.
Low-interest rate cards work well when you're looking for big-ticket items and you don't have time to save for the purchase. These cards certainly are more attractive than the credit cards offered by retail outlets, which have certain drawbacks such as high interest rates that you should know about.
Lower rates also can encourage businesses to borrow funds to invest in expansion, such as purchasing new equipment, updating plants, or hiring more workers. Conversely, higher interest rates can restrain such borrowing by consumers and businesses, which can prevent excesses from building in the economy.
Say you owe $5,000 on your credit card and your APR is 25.99%, a bit more than the national average. If you set a goal to pay off your balance in one year, your monthly payment would come out to around $478 per month.
How much is 26.99 APR on $3,000? An APR of 26.99% on a $3,000 balance would cost $67.26 in monthly interest charges.
A credit card APR below 10% is definitely good, but you may have to go to a local bank or credit union to find it. The Federal Reserve tracks credit card interest rates, and an APR below the average would also be considered good.
Pay Off the Card with the Highest Rate
If you've got unpaid balances on several credit cards, you should first pay down the card that charges the highest rate. Pay as much as you can toward that debt each month until your balance is once again zero, while still paying the minimum on your other cards.
Generally, what's considered a bad interest rate is anything higher than 10%. Ideally, you want to get an interest rate that's below 5% — but with little or bad credit, that can be harder to achieve.
At the individual level, low interest rates are ideal if you're interested in taking out a large loan (such as a mortgage) or could benefit from refinancing an existing high-interest loan. On the other hand, high interest rates are good for managing inflation and stabilizing prices.
Even people with good credit scores make mistakes, and a bank may charge a penalty APR on your credit card without placing a negative mark on your credit report. Penalty APRs typically increase credit card interest rates significantly due to a late, returned or missed payment.
In most cases, however, it's best to keep unused credit cards open so you benefit from longer credit history and lower credit utilization (as a result of more available credit). You can use the card for occasional small purchases or recurring payments to keep it active as opposed to using it regularly.
There are some differences around how the various data elements on a credit report factor into the score calculations. Although credit scoring models vary, generally, credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.
Balance transfer fee. This fee will typically be 3% to 5% of the amount transferred, which translates to $30 to $50 per $1,000 transferred. The lower the fee, the better, but even with a fee on the high end, your interest savings might easily make up for the cost.
If you tend to carry a card balance, you should aim to minimize interest expenses by using a low-interest rate card. You may have to pay an annual fee in exchange for the low rate but may save more in interest expense during the year than the cost of the annual fee.
For example, if your APR is 29.99%, 29.99% divided by 365 days is 0.082% per day in interest. Your credit card company usually offers a grace period between your statement closing date and your due date. You won't owe interest if you pay your balance in full by the due date.
A credit score is a three-digit number, typically between 300 and 850, designed to represent your credit risk, or the likelihood you will pay your bills on time. Creditors and lenders consider your credit scores as one factor when deciding whether to approve you for a new account.
The 15/3 rule, a trending credit card repayment method, suggests paying your credit card bill in two payments—both 15 days and 3 days before your payment due date. Proponents say it helps raise credit scores more quickly, but there's no real proof. Building credit takes time and effort.
Paying off a credit card early is a smart move. This can reduce the interest you'll need to pay. You won't need to pay any interest on most transactions if you pay your full balance on time every month. Although interest for certain transactions, such as cash advances and balance transfers, will still apply.
Payment history is the most important factor in maintaining a higher credit score as it accounts for 35% of your FICO Score. FICO considers your payment history as the leading predictor of whether you'll pay future debt on time.
Key takeaways
Your credit card APR can go up if the prime rate changes, you paid your credit card bill late, your intro APR offer ended or your credit score dropped. If your APR increases, you can work on paying down your balance or transfer your balance to a card with a low or 0 percent intro APR offer.
The average FICO credit score in the US is 717, according to the latest FICO data. The average VantageScore is 701 as of January 2024.