What Does APR Mean for My Credit Cards?
Paying off debt is the most common financial goal of 2024. Getting out of debt is simple, but it’s not easy. To get out of debt (and stay out), it’s crucial to understand the details of your debt, especially the APR. Here are five common questions about APR:
What does APR mean?
An annual percentage rate (APR) is the interest rate on a debt expressed as the amount you will pay annually. The APR makes it easy to compare rates between different credit cards and other types of debt.
Interest on most credit cards accrues and compounds daily, even though it’s charged monthly. For example, if your credit card has an APR of 25%, your daily interest rate is 0.0684% (25% / 365 days). That means if you have a balance of $10,000 after your statement due date passes, you accrue $6.84 of interest on the first day. The next day, your daily interest is calculated on your balance of $10,006.84. By the end of the month, your daily interest charge is $6.99 and you’ll owe a total of $215.
Where can I find my APR?
The easiest place to find your APR is on your credit card statement. If you download your statement electronically, you can search “APR” in the document to locate it. Keep in mind that your APR is variable and will change so don’t assume the APR you started with is your current APR.
Why did my interest rate increase?
There are several reasons why your interest rate might have increased, but these are the main possibilities:
The Federal Reserve raised interest rates: The Federal Reserve sets interest rates for lending between banks. Banks then use this rate as a basis for setting the interest rates they charge to customers. That means that when the Fed raises interest rates, you’ll see an increase in your APR on variable-rate debt like credit cards.
Your credit profile changed: Credit card companies manage their risk by charging higher APRs to consumers they view as less likely to pay back what they owe. If you’ve missed a payment or you’re carrying higher balances than you used to, your creditor may increase your rate. They are required to notify you if that’s the case.
Does interest apply if I pay on time?
Interest is only added to your credit card balance after your payment due date so if you pay off your statement balance by then, you will not pay any interest. This means that you don’t need to worry about whether your APR is high if you pay your statement balance in full each month.
How can I lower my APR?
You can call your creditor to ask for a lower rate, although there is no guarantee that you’ll get it. You’ll have the best chances of success if your credit score has increased recently. You might also get a lower rate temporarily if you’re going through a financial hardship such as a job loss. Credit unions and lenders you have a long-standing relationship with are more likely to work with you.
If your credit score is at least in the 680-700 range, you also may be able to reduce your interest rate with a balance transfer card. With a balance transfer card, you can transfer the balance of one credit card to another that has a 0% interest for a limited time period. Keep in mind that the amount of balance you can transfer is up to the creditor but it is typically no more than $8,000-$10,000. Alternatively, if you have higher balances, another option is to consolidate your debt with a personal loan.
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