The average credit card annual percentage rate is high right now -- coming in at over 21% on average, according to the latest data from the Federal Reserve.
Your credit card’s interest rate and APR play a major role in how much you pay when you carry debt from one month to the next. Credit cards tend to have different rates for different types of transactions, like purchases, balance transfers and cash advances.
With Americans’ cumulative credit card debt in the trillions, knowing how all the different credit card interest rates work can help you make more informed decisions about your credit balances.
What is an annual percentage rate?
Annual percentage rate is the rate at which your credit card balance accrues interest. For credit cards, your APR is the price you pay to carry a balance on your credit card from one month to the next.
APR is expressed as a percentage and represents the amount of interest and other fees you pay on the card over the course of an entire year, though it actually accrues at a daily rate.
Types of APRs
There are different types of APRs -- depending on the type of transaction. Here’s an overview:
- Introductory APR: Many credit cards come with introductory APRs that are lower than the card’s normal APR. An introductory APR may be as low as 0%, but only for a limited amount of time.
- Purchase APR: This APR applies to purchases you make on your credit card throughout the month and don’t pay off by the payment due date.
- Balance transfer APR: A balance transfer is when you move the balance of one credit card to another, often to take advantage of a low introductory rate. When the introductory rate ends, your balance transfer is subject to the regular variable APR a credit card charges.
- Cash advance APR: A cash advance is when you borrow money from your credit card balance in the form of a loan, usually by using it at an ATM. Credit card cash advances typically have a higher APR than purchases.
- Penalty APR: If you violate any terms of your credit card, such as by missing a payment due date, you may be subject to a penalty APR that is higher than your purchase APR.
APR vs. interest rates: What’s the difference?
Many people use the terms APR and interest rate interchangeably, but your APR and interest rate are two different things. In fact, APR represents the interest rate combined with other financing fees.
However, in the case of credit cards, “APR” and “interest rate” are really the same. Other fees, such as annual fees and balance transfer fees, are charged separately from the APR.
Fixed vs. variable APR: What’s the difference?
Just like with any other type of financing, credit cards can come with either fixed or variable APRs.
A fixed-rate credit card has the same APR the entire time you hold the card. This type of APR can be beneficial, especially when interest rates are low, as they allow you to lock in a low rate for the life of the credit card.
A variable-rate credit card is one with an APR that’s tied to a particular index -- often the prime rate, set by the Federal Reserve. As the prime rate fluctuates, so too does the APR that credit card issuers are willing to offer their customers.
While it is possible to find a fixed-rate credit card, the vast majority of credit cards have a variable rate. If you’d prefer a fixed-rate credit card, you’ll probably have to look somewhere other than with the major credit card issuers. Instead, look to credit unions and local banks, which are more likely to offer fixed-rate cards.
How an annual percentage rate works
An APR applies to purchases and balances added to your card that you don’t pay off. Your credit card issues a monthly bill at the end of each statement period. After your bill is issued, you have a grace period -- usually about 21 days -- during which your purchases don’t accrue interest.
Any purchases on your card that you don’t pay off by the due date and the end of the grace period will begin to accrue interest. To calculate interest, banks use a daily periodic rate, which is your APR divided by 360 or 365. For example, with an APR of 20%, your daily periodic rate could be .05479%.
To calculate the amount of interest you’ll actually pay, divide your daily periodic rate by the number of days in a billing period, and then multiply that rate by the amount of your credit card balance that’s subject to interest.
Here’s how an APR can cost you
Credit card interest charges are often much higher than other types of financing. It’s easy to get caught in the trap of racking up credit card debt, not paying your purchases off by the due date and then seeing most of your monthly payments go toward interest moving forward.
According to a 2023 Experian report, the average credit card balance is around $5,910. If you had a credit card APR of 20% and paid just $200 on your card each month, you would pay more than $2,296.74 in interest to become debt-free. And remember, that’s only if you didn’t make any new purchases while you paid down the balance.
“Credit card interest can greatly impact a consumer’s ability to repay what was borrowed, if they are not careful,” said Shanté Nicole, a credit coach and the founder of Financial Common Cents.
“It’s imperative to remain in control of your spending, ensuring that you have the funds to repay what was borrowed the moment the bill is due, and not depending on the minimum payments to keep you afloat. Each month the balance is carried beyond the due date, interest is charged, which can result in much deeper debt than the borrower intended.”
The faster you pay off your balance, the less debt there is to accrue interest, and therefore the less interest you’ll pay over the life of the debt. Ideally, you’ll pay your balance in full to avoid interest altogether, but if you can’t, pay more than the minimum to reduce interest charges.
“Credit cards should only be used for things you already have the money for,” Nicole said. “This way, you’re guaranteed to never pay interest. Once you borrow money for a purchase, pay in full on the due date. No balance is carried over and no extra fees are being paid.”
What’s a good credit card APR?
According to Federal Reserve data, the average rate on a credit card as of November 2023 came in at 21.47%. You can use this number as a benchmark to help you determine if you’re being charged a reasonable rate.
Remember, while the average rate might be 21.47%, that doesn’t mean it’s the rate everyone will qualify for. In general, the APR you’re eligible for on a credit card or any other type of financing depends on your credit score.
In general, the best APRs are reserved for those with high credit scores. For borrowers with lower scores, the average rate can climb much higher to 29.99% or more. One of the best ways to reduce the amount you spend on interest -- aside from paying your full balance each month, is to improve your credit score.
If you know you need to carry a balance on a credit card, consider a 0% introductory card or a low-interest rate credit card to save money in interest charges. You can also consider alternatives like personal loans, which typically come with lower interest rates than credit cards and are fixed for the duration of the loan term.
The bottom line
Credit card interest rates are high, so you won’t be doing yourself any favors by carrying credit card debt. Knowing all of the potential charges a credit card can have can help you keep borrowing costs as low as possible.
First published on Aug. 18, 2021 at 4:00 a.m. PT.
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