Credit cards are convenient, widespread tools that make handling money much more straightforward. If used responsibly, they can help you make larger purchases and earn rewards.
However, credit cards don’t come without costs and mandatory fees. And, if you misuse them, you can face multiple — and expensive — repercussions. One of these repercussions is higher interest rates.
Continue reading to understand what credit card interest rates are, how they’re calculated, what a good interest rate looks like, as well as to learn how to reduce or maintain lower interest rates.
What is a credit card interest rate?
A recent study showed that most American households have acquired over $1,100 in credit card debt, and that accounts for interest charges only. If left unattended, debt in any form can take a toll on your finances and inhibit you from being approved for other ventures in the future.
In the end, interest rates are dependent on the individual, their credit card, how they use that card, and their credit score.
How is credit card interest calculated?
When you fail to pay off the entirety of your credit card bill each month, your credit card company charges you a fee in the form of interest.
Your interest rate is determined by dividing your annual percentage rate (APR) by 365 days. An APR determines how much your loan costs you. Multiply your APR value by the current balance on your card and your daily interest rate. The result is your overall interest fee. Sometimes your intro APR level is lower due to a promotional period offered by lenders.
Different lines of credit have different interest rates, but these rates add a percentage to the balance that you already owe.
There are various online platforms you can use to calculate your personal rate as well.
What is a good interest rate on a credit card?
Interest rates can be a fixed number, or they can be vulnerable to fluctuation. The average interest rate is around 20 percent. Anything below that threshold is a good rate.
How lower interest can help you
You may be wondering why you should care about your interest rates. Paying interest means that you're paying more for your purchases than you originally intended, and, by extension, that you’re borrowing more money from your credit card issuer.
Lower credit card interest can help you pay off debt sooner, which can also improve your overall credit score.
That said, you should review your credit reports regularly. You’re entitled to a free credit report from any of the three major credit bureaus — Experian, Equifax, and TransUnion — once a year. It’s best to take advantage of these reports because if you don’t know where you stand financially, you won’t be able to boost or repair your credit.
According to FICO and VantageScore, two of the most popular models for credit score computations, payment history is the most crucial aspect of your score at 35 percent. Paying off your credit card balance from month to month improves your payment history and increases your credit score. In the eyes of banks and other lenders, you’ll illustrate responsible behavior and the ability to handle credit. These financial institutions will be more eager to negotiate and enter into business with you in the future.
Five ways to reduce credit card interest
Tip #1: Pay off your cards in order of their interest rate.
One way to reduce your interest rates is by paying off your debt with the lowest amount of interest. This way, you’ll be able to settle your debt quicker, gain some confidence in the process of paying off debt, and see an increase in your credit score. Gradually, you’ll work your way up to your most significant debt. This method is also known as the snowball method.
In comparison, you can also adhere to the avalanche method, which is the direct opposite. In this case, you focus on paying off your highest-interest debt first, then the next highest, and so on. This method takes bigger steps, faster.
Tip #2: Make multiple payments each month.
Paying off your full balance will help keep your interest down, either through a series of smaller payments or with one lump payment. Anything you don’t pay as part of your minimum payment shifts over to the next month's billing cycle, and fees will begin to compound. Don’t skip a payment, either, or the fees will be even higher.
Pay off each purchase you make with your card as soon as possible. The earlier you pay, the less you’ll need to worry about missing due dates and acquiring interest you can’t afford on late payments.
Tip #3: Avoid putting medical expenses on a credit card. As of April 2021, nearly 27 million Americans charge medical fees to their credit cards. Medical bills are notorious for being unexpected and costly, especially if you can’t pay them off in a timely fashion. Always talk to your creditor, your doctor, or the hospital itself to learn about other options. Applying for a small personal finance loan is an alternative strategy to using your credit card.
Tip #4: Stay under 30 percent of your total credit limit. There’s a reason experts recommend this course of action: it keeps your interest low while boosting your credit score. Credit utilization accounts for 30 percent of your credit score calculation. Keep an eye on your monthly statement.
Establishing a budget and only making necessary purchases on your credit card will keep your spending and credit utilization ratio in check.
You may also consider using your debit card for a longer period until you get your expenses under control — especially for less important things, like dining out or going to the movies. Then you're withdrawing funds directly from your bank account, so you'll be able to keep yourself more accountable than you would with a credit card.
Tip #5: Get a low-interest credit card for future spending. This can be a smart option for those who consistently carry an unpaid balance on their credit cards, since high interest will accumulate faster. Many credit card companies even offer a zero percent introductory credit card grace period, meaning you won’t have to pay any interest fees on new purchases. This period typically lasts for 12–18 months. Remember, interest fees will apply as soon as this window closes, so a low-rate card will be a huge help.
Another option for you to consider is a card that has no yearly interest fees. Allow us to introduce Point Card.
Designed as a transparent, easy-to-use alternative payment card, Point allows cardmembers to exercise fiscal independence and spend their own money while receiving exclusive benefits. This includes unlimited cash-back and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases.
And most importantly, Point comes with no interest rates. Plus, no credit check is required. In addition to offering supplementary safety measures like car rental, phone insurance, and fraud protection with zero liability, Point helps you rest easy and focus on growing your wealth and saving money for what truly matters.
You work hard for your money, and Point will always work hard for you in return, regardless of where you are on your financial journey.
Made to spend.