What Is a High APR for a Credit Card?
Learn to identify a high credit card APR and understand its impact on your borrowing costs and debt management.
The Annual Percentage Rate (APR) represents the yearly cost of carrying a credit card balance, expressed as a percentage of the amount owed. Understanding what constitutes a “high” APR is important for consumers, as it significantly impacts their financial well-being and the overall expense of using credit. This rate is a primary factor in comparing credit card offers and making informed financial decisions.
Defining High APR
APR is the annual cost of borrowing money on a credit card. Unlike some other loans where APR might include additional fees, for credit cards, the APR refers to the interest rate itself. If you do not pay your statement balance in full each month, interest charges will accrue based on this rate.
What is considered a “high” APR can vary based on market conditions and the type of credit card, but general benchmarks exist. The average credit card APR for accounts assessed interest has been around 22% to 25%. Therefore, an APR exceeding this range, perhaps above 25% or 26%, would generally be considered high for a typical consumer. Some cards, like private label store cards, might have average rates closer to 27% to 28%, making anything significantly above that high for their category.
Credit cards often feature different types of APRs that apply to various transactions:
- Purchase APR: The rate applied to new purchases if a balance is carried over.
- Cash advance APRs: Typically higher than purchase APRs and usually begin accruing interest immediately without a grace period.
- Balance transfer APRs: Apply to transferred debt and can sometimes be lower, especially during promotional periods.
- Penalty APR: A significantly higher rate applied if payments are consistently late.
Factors Influencing APR
The APR assigned to a credit card is determined by several factors, with a consumer’s creditworthiness being a primary consideration. Credit scores and credit history provide lenders with an assessment of risk; a higher credit score indicates lower risk and can lead to a lower APR. For instance, individuals with excellent credit (e.g., FICO scores of 800+) might see average APRs around 19.6%, while those with lower credit scores could face average rates of 27.91% or higher.
The type of credit card also plays a role in its typical APR range. Rewards credit cards, for example, often have higher APRs compared to basic, low-interest cards. Secured credit cards, designed for individuals building or rebuilding credit, might also have higher APRs. Store credit cards are another category that frequently carries higher interest rates.
Credit card APRs are variable, meaning they can change over time. These variable rates are typically tied to a benchmark interest rate, most commonly the U.S. Prime Rate. The Prime Rate is influenced by the Federal Reserve’s federal funds rate and serves as a base lending rate for many financial products. Credit card issuers add a margin to the Prime Rate to determine the cardholder’s APR. Promotional or introductory APRs, such as 0% offers, are temporary rates that revert to a standard, higher APR after a specified period.
Impact of High APR
A high APR significantly increases the cost of carrying a credit card balance. When a balance is not paid in full by the due date, interest begins to accrue, calculated daily on the average daily balance. This means that each day, interest is charged not only on the initial balance but also on any accumulated interest, leading to a compounding effect.
The higher the APR, the more rapidly and substantially interest charges accumulate, making debt more expensive. For instance, carrying a balance of $7,000 at a 27.91% APR could result in over $4,400 in interest paid over 46 months, assuming a $250 monthly payment. In contrast, the same balance at a lower APR of 20.79% could reduce interest paid by nearly $1,800 and shorten the repayment period by seven months.
A high APR can also considerably lengthen the time it takes to pay off debt, especially if only minimum payments are made. A larger portion of each minimum payment goes towards interest rather than reducing the principal balance. This results in the consumer paying a much greater total amount than the original purchases. Understanding the impact of a high APR is important for managing credit card debt effectively.