What Is a Good Interest Rate on a Credit Card

A credit card is a payment card that allows you to borrow money from your card issuer. Credit card issuers usually give you a credit card limit. That is the maximum amount of money you can borrow with the card. The credit card loan is what we call a line of credit and the limit varies from one person to another. Since the money is like a loan, you have to pay with some interest. But what is a good interest rate on a credit card?

I will explain in detail what a good interest rate is. For your information, interest is the amount of money you pay on top of what you borrowed. It is usually calculated in percentage of the total amount borrowed. For example, if you borrowed $1000 from your line of credit with an interest rate of 10%, you will pay $1000 plus 10% of $1000. That means you will pay $1100. Interest rates on credit cards are known as APR.

 When you borrow with your credit card, you have to repay the loan at the end of the month. There is usually a set date on when you should repay your debt. You are supposed to adhere to the date to set a good credit history. Credit card issuers and loan issuers usually report your credit card or loan repayment to the credit bureaus. If you do not make your payments as per the agreements, you will have a bad credit report.

Who issues credit cards?

Banks, credit unions, and some online financial platforms issue credit cards to eligible applicants. There are two types of credit cards that you can get from the financial institutions I have mentioned above. These include;

  • Secured
  • Unsecured

Secured credit cards are for people with no credit history. When talking of credit history, we are talking about details about your past repayments of loans and lines of credit. If you have never taken a loan, then it means that you do not have any credit history. By the way, secured credit cards are helpful to give you a credit history and credit scores. Secured credit cards require one to deposit some money to the card issuer to act as security for the borrowed amount. Remember that you are still new to the credit world, and nobody knows whether you will repay your loan or not.

When you gain some credit scores, you can then advance to have an unsecured credit card. The deposit you have made will then be available for withdrawal or use in other transaction types when you grow your credit scores. Unsecured credit cards do not need a security deposit as they require credit scores. The better your credit scores, the higher limits, and the lower the interest rates.

But what kind of credit card can I get with bad credit? If you have bad credit scores, it means that you took a loan or line of credit and may be paid inappropriately or defaulted. You can either opt for a secured credit card or an unsecured credit card for bad credit scores. Such credit cards are meant to help you rise from bad credit to good and credit range.

What are credit scores?

Credit scores are numbers that are used to show the creditworthiness of an individual. They show your ability to pay a certain amount of loan. Creditors will only give you a low credit limit or loan amount if you have low credit scores. If you have high credit scores, creditors will trust you and give you high limits for your loans or lines of credit.

Credit scores range from 300-850, with 300 being the poorest while 850 is excellent. The following table shows different credit scores from very bad to excellent.

FICO Scores Category
800-850 Exceptional
740-799 Very Good
670-739 Good
580-669 Fair
300-579 Very poor

It is essential to understand that credit bureaus are the ones entrusted with the mandate to calculate credit scores. The bodies receive information about your loan and credit card payments and then use various pieces of information to calculate your credit scores. We have three credit bureaus in the country. They include;

  • TransUnion
  • Experian
  • Equifax

What is a good interest rate on a credit card?

what is a good interest rate on a credit card

Somewhere up, I have mentioned that if you have good credit scores, you automatically qualify for higher credit limits with better interest rates. Financial companies usually call the interest rates the annual percentage rates (APR). But now, which interest rate is good? As of February 2021, the average APR for credit card accounts was 15.91%. That is according to the Federal Reserve.

The best interest rate on a credit card should lie between 13% – 25% Variable APR. We are considering rates that will not harm you financially and that will keep the financial institutions running. Various credit cards have a 0% intro APR period. During the 0% APR period, you pay no interest on the amount of money you borrow.

You require good credit scores to get the best APR. However, different credit card issuers can offer different rates for equal credit scores. Credit cards with rewards usually have high-interest rates compared to those with no rewards. You can understand why it happens because they have to compensate for the money they lose when issuing rewards. Financial institutions are very tactical when issuing rewards. They always have plans on how they will return the money.

What are the different types of Credit Card APR?

Credit card issuers usually have different types of APRs. You can find these types of APRs in the terms and conditions of your credit card. Various credit cards have variable rates, and it is essential to read and understand how the rates go. The following are various types of APRs. Have a look.

i) Introductory or promotional APR

Introductory APRs are usually low and are meant to welcome new customers who have transferred their balances or made purchases. In most cases, the APRs are 0% meaning that you pay no interest rate on a credit card during a specific period. The intro APR can last for a few months to around 20 months. It then increases to a variable rate according to your credit scores.

ii) Purchase APR

The Purchase APR applies when you make new purchases on a credit card and then forward your balance into the next billing cycle. The APR type is the commonest with credit cards.

iii) Cash Advance APR

Cash Advance APR is the rate credit card issuers charge when you withdraw funds from ATMs using our credit card. The rates are usually high, and it is not wise to use your credit card to get money from an ATM.

iv) Balance transfer APR

The APR applies when transferring a card balance from one card to another. The other card where you are transferring the balance should have a lower APR than the current card.

v) Penalty APR

If you are late in your payments, credit card issuers usually charge you an APR to penalize you for late payment. Usually, credit card companies charge penalty APRs when you are 60 days past the payment schedule.

How do I qualify for better APRs?

If you want to qualify for low APR, then there are things that you must do to allow that. They include the following.

1) Check out your credit scores

Credit scores are the core determinants of the credit card that you get. If you want credit cards with a good APR, you should consider raising your credit scores in the best way possible. You have no credit scores, you can get a secured credit card to boost you in the process. If you are asking how to get approved for a credit card with no credit, then secured credit cards are the best way forward.

2) Make payments on time.

Your payment history contributes significantly to your overall credit scores. 35% of your total credit scores come from the payment history. If you pay your credit card on time and pay appropriately, you will likely have good credit scores.

3) Maintain a low credit utilization

If you want a good credit score rating that will lead to low APR, use at most 30% of your credit limit. You will be showing a lot of irresponsibleness if you try to make such a mistake. If you increase your credit scores, make sure you request a higher credit limit to get a large amount of money to use.

4) Avoid applying for many credit cards at once

When you apply for many cards, companies make many hard inquiries on your credit scores that lower your overall scoring significantly. Make sure you get one or two if the need arises.

5) Keep your credit cards active.

Never keep your credit cards dormant since that can negatively impact your credit scores. You can use a little of your credit limit to avoid lowering your credit scores, leading to high APR.

6) Monitor your credit report

You should get a free credit report every year at Annual Credit Report. Your free credit report allows you to check on various issues and rectify them where possible. If you find cases of identity thefts, you can then dispute to maintain high scores for better APR.

Bottom line

Credit cards allow you to borrow from your card issuer. You can either have a secured or unsecured credit card. Secured credit cards require a deposit, while unsecured credit cards require your credit scores. Once you get a credit card, you pay the amount borrowed plus any interest. The higher your credit scores, the lower your APR. You should read the terms and conditions to understand the various APRs charged on your card.