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Many credit card users don’t pay much attention to the interest rate, also known as the annual percentage rate (APR), as long as they pay their bill on time every month. But a high APR can still hurt your finances in small ways over time. We’ll look more closely at why APR is important even if you pay on time.
What is APR?
APR stands for annual percentage rate. This is the interest rate you are charged on any balances you carry on your credit card from month to month. Credit cards have variable APRs meaning your rate can go up or down over time depending on economic factors.
Any amounts you don’t pay by the due date will cost you more interest if your APR is high. This is why APR is so important if you rarely pay off your balance in full every month. What’s more, the APR is important even if you pay off the loan in full.
How APR Can Impact You as an On-Time Payer
These things can happen to your money if you pay your bill on time but the APR is high:
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Rates go up on new transactions: let’s say your APR is 20%25, but it goes up to 20%29% after that. That new 0.29% interest rate will be used for all new transactions, which means that your interest rates on the balance for the next month will be higher.
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Penalty APR: Make a late payment or go over your credit limit and you could trigger a penalty APR, which could be around 30%. If you carry a balance the next month, that penalty APR will greatly increase your interest fees.
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Balance transfers: Want to transfer a balance from another card to save on interest? The APR on the new card will determine how much you save. A lower APR means lower fees.
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Loans: Some credit cards let you take out a loan against your available credit. The APR will determine the interest rate on the loan.
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Credit score impact: High credit utilization (balance compared to limit) hurts your credit scores. But because your limit is lower on cards with high APRs, your utilization ratio could be higher, impacting your credit.
So while you avoid interest fees by paying on time, the APR still lurks in the background affecting other aspects of your finances. Let’s look at why it pays to seek out lower APRs when possible.
Why You Should Aim for a Low APR
Given the various ways your APR can impact your finances, it’s wise to have cards with lower interest rates whenever feasible. Here are some perks of a lower APR:
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Saves money: If you do carry a balance, the interest fees will obviously be lower with a reduced APR. Even a few percentage points can save big over time.
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More flexibility: Life happens and you may need to carry a balance occasionally. A lower rate gives you more flexibility in those situations without getting hit with exorbitant interest fees.
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Makes transfers/loans practical: Transferring a balance or taking out a loan against your credit line will only help your finances if the APR on the new card is substantially lower. Shoot for the lowest rates.
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Higher limits: Issuers typically give higher credit limits on cards with lower interest rates. This improves your credit utilization.
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Easier to get: In general, the higher your credit score, the lower the APRs available to you. Getting approved for low-rate cards indicates good credit.
While shopping only based on interest rate is unwise, making APR a priority can be valuable. Weigh it along with other features like fees, rewards, etc.
Tips for Getting a Low APR
Here are some pointers to keep in mind as you shop around for lower rate credit cards:
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Check your credit score: Aim for a minimum score of at least 700 to qualify for competitive APRs. The higher your score, the better your chances.
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Consider your credit history: Having a long history of managing credit responsibly helps qualify for the lowest rates. A short, limited history makes approval harder.
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Reduce debt: Lenders look at your debt-to-income ratio. The lower your existing debts, the better your case for a low APR. Pay down balances before applying.
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Compare carefully: Don’t just look at the range but the specifics of the APR offers. Also consider balance transfer and penalty APRs.
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Negotiate: If you’ve been a long-time customer with excellent credit, you may be able to negotiate a lower APR with your current issuer.
Doing your homework, understanding the role of APR, and taking steps to improve your credit can help you land the most favorable rates. While not crucial for on-time payers, a lower APR provides valuable flexibility and financial savings.
In Summary
While it’s smart to always pay your bill on time and in full, the APR on your credit cards still matters. The interest rate affects many aspects of your finances including potential interest fees, credit limit, loan rates, balance transfers, and credit score. Seeking out and qualifying for low APR cards provides more financial flexibility and control. Check your credit, reduce debts, and negotiate with issuers to get the most competitive rates possible.
What to consider if you need to carry a balance
Not paying your balance in full can negatively affect your finances. This can happen any month in which your spending outpaces your income, whether you overspend or something unexpected, such as a medical emergency, throws a wrench in your budget.
But at the end of the day, life happens, and sometimes we just need a way to rebound. To help you stay on top of your credit card balance, keep the following tips in mind:
- Don’t ignore the fine print. Even low interest rates come with terms and conditions, so be sure to review your card’s fine print. For example, find out when your card issuer could raise your interest rate, which could make it more difficult to pay off your balance.
- Consider your budget. If you need to carry a balance, try to keep it within your comfort level. It’s better to be conservative. If you can’t pay it off in a few months, consider how your debt will affect your finances if the interest continues to accrue.
- Consider your credit score. Your credit score is another factor to consider before carrying a balance. Payment history and amounts owed are two of the most important factors when it comes to calculating your credit score. If you can’t pay off your credit card debt and your balance gets out of control, your credit score will suffer.
If you pay off your purchases in full by your card’s due date and your issuer offers an interest-free grace period on purchases, you can largely ignore your credit card’s APR. However, if you do end up carrying a balance, completing a cash advance or making a balance transfer outside of a promotional period, those pesky percentages can add up quickly.
If you’re navigating credit card debt and aren’t sure where to go from here, consider using Bankrate’s credit card payoff calculator to determine how many months it might take to become debt free.
Your purchase APR doesn’t matter if you pay off your balance each month, thanks to your grace period
The Credit CARD Act of 2009 requires lenders to deliver your bill to you at least 21 days in advance of when it’s due. During this time, most lenders offer an interest-free grace period. Most card issuers charge no interest on purchases from the time you tap or swipe your card all the way through the due date on your bill — assuming you aren’t already carrying a balance from the prior statement cycle.
Here are some things to keep in mind:
- Most major credit card issuers offer an interest-free grace period, but they aren’t required to. You must read your credit card’s fine print or talk to a customer representative to confirm that your lender does offer this benefit. In the Schumer box of your card agreement — that’s the chart full of rates and fees at the top of your document — you should see a section that says something like “How to avoid paying interest on purchases.”
- Interest starts accruing when the grace period ends. Assuming you enjoy the typical interest-free grace period on purchases, know that when it ends, any remaining unpaid balance will accrue interest. If you pay your balance in full and you’re only using your card for purchases, you’re generally in the clear.
- You can enjoy a grace period each billing cycle as long as you pay your balance in full. If you have a grace period and pay off your balance by the due date, that grace period continues and you’re able to make new purchases with your credit card without paying interest. A card issuer can – and usually does – revoke an interest-free grace period for at least a billing cycle or two after you’ve carried a balance.
If you consistently pay your credit card purchases off each month, it doesn’t matter whether your credit card charges an interest rate of 10 percent or 25 percent. You aren’t carrying a balance on those purchases, so your issuer won’t charge you interest. Still, you should have some idea what your card’s interest rate is so you’re prepared in the event you unexpectedly find yourself carrying a balance one month.
Does Credit Card APR Matter If You Pay On Time? – CreditGuide360.com
FAQ
Does APR apply if you pay on time?
No, if you pay your credit card balance in full and on time every month, you generally won’t be charged interest (APR). Credit card issuers typically offer a grace period, allowing you to avoid interest charges on purchases if you pay the full balance by the due date.
Does APR matter if you pay off early?
The APR (Annual Percentage Rate) on your credit card doesn’t really matter if you pay off your balance in full every month by the due date.
How much is 26.99 APR on $3000?
A 26. 99% APR on a $3,000 balance would result in $67. 26 in monthly interest charges. This calculation assumes the interest is calculated on a monthly basis.
Is 29.99 APR good or bad?
Yes, a 29. The 99% APR is high for a credit card because it’s higher than the average APR for new credit card offers. Credit card APRs can be much lower, and some cards offer an introductory 0% APR for a certain number of months, which can save you a lot of money.