APR (Annual Percentage Rate) is a yearly fixed or variable interest rate that measures the cost of credit. It reflects the total yearly cost of the interest on a loan, expressed as a percentage rate.
Fixed vs. variable
Your credit card rate is either fixed or variable. According to a Federal Reserve credit card survey, approximately 58% of credit cards have variable rates while 42% have fixed rates.
F (Fixed): If the letter “F” follows the annual percentage rate (APR), the rate is fixed and not adjustable. However, this does not mean that the rate is fixed forever. The issuer need simply provide you with a 30-day written notice that your interest rate will change. You will receive such a notice by mail or as an insert in your bill.
V (Variable): The credit card interest rate is variable and subject to change if the letter “V” appears after the annual percentage rate (APR).
What are good rates?
According to the Federal Reserve, the average APR on all credit cards is 14.9% (this rate fluctuates; check with LowCards.com for current rates). Aim for an APR of 10% or less. The better your credit score, the lower your rate. If your rate is higher than 12% and you have a good credit score and good payment history, contact your credit card issuer and ask for a lower rate.
Applying for a new card: what rate will you receive?
Since credit cards advertise their lowest rate, estimating your actual rate takes a bit of searching and guessing. Since your credit score and application will determine your interest rate, obtain a copy of your credit report before you apply for a card.
FICO scores range between 300 and 850. The following table outlines the general credit score tiers and what they mean:
|Over 750||Excellent||Should have an easy time getting loans with the best rates|
|720 or higher||Very good||Should have an easy time getting loans with good rates|
|660 to 720||Acceptable||Lender will take a closer look at you|
|620 to 660||Uncertain||Higher risk and higher rates|
|Less than 620||Risky||Credit options will be limited or not available|
Credit cards are required to list the range of interest rates and fees in their terms and conditions—the fine print. Each card’s description page or application contains a link to this information. With typically three or four rate tiers, you can guess the interest rate you are most likely to receive based on your credit score.
If this is your first credit card and you have a limited credit history, or you have multiple loans and are close to your limits with other cards, you can expect to receive one of the higher rates.
Unfortunately, you will not know your rate until after you apply and receive your offer in the mail. If the rate is higher than what you expected, contact the credit card company and ask for an explanation or reconsideration. You may also cancel the card.
If you cancel the card to search for another, don’t apply for more than three or four cards in a six-month period. Multiple credit card inquiries will post a red flag on your credit report.
How do I ask for a lower rate?
In its October 2007 issue, Consumer Reports surveyed thousands of readers and found that people who call to negotiate a lower interest rate succeed more than half the time. In addition, 79% are successful at having a penalty fee removed.
When should you ask for a lower rate?
- If you have a good payment history and your APR is over 12%. The average APR is 14.9%.
- If you received a high rate for your first credit card, have made your payments on time, and have stayed under your credit limit for six to twelve months.
- If your card started out with a low rate, but your issuer has increased it several times.
- If you have had the same card for several years and your balance is less than 30% of your credit limit.
Requesting a lower rate is simple, even if negotiating seems out of your comfort zone. Call the number on the back of your credit card or bill. Tell them you have been a good customer but you would like a lower rate. Mention that you have received several offers with lower rates in the mail and have done online research for cards with lower rates. Inform them that you want a lower rate on your card or you will switch to another card with a lower rate. Ask what they can do to help you.
If the first person tells you that he can’t lower your rate, call back in a month. This is one area where persistence may pay off. If that person tells you he can’t lower your rate, remind him that there are other cards available.
Reducing your interest rate by four points (from 18% to 14%) will save you $200 a year on a $5,000 balance. Apply these savings to pay down your balance.
When can issuers increase your rate?
Basically, issuers may change your rate at any time for any reason. All issuers state this in their terms and conditions. For example, the following comes from the fine print of a Chase credit card:
“We reserve the right to change the account terms (including the APRs) at any time for any reason, in addition to APR increases that may occur for failure to comply with the terms of your account. For example, we may change the terms based on information in your credit report, such as the number of other credit card accounts you have and their balances. The APRs for this offer are not guaranteed; APRs may change to higher APRs, fixed APRs may change to variable APRs, or variable APRs may change to fixed APRs. Any changes will be in accordance with your account agreement.”
Under the Universal Default policy, issuers may increase your rate if you have made a late payment or have missed a payment with any of your other creditors. Issuers may also increase your rate if your credit score drops because they perceive this as an increase in the risk that you will default. Under Congressional pressure, some issuers have stopped using Universal Default.
How do I challenge a rate increase?
Rate increases, especially unreasonable ones, can be irritating and frustrating. There are two ways to approach a rate increase: one is with honey and the other is with vinegar. In most instances, honey works best.
Call in a pleasant manner and explain that you are a good customer, then ask your issuer to drop the rate to something more suitable. If this doesn’t work, ask for a manager. If that doesn’t work, call back in a few days.
The other option is to accept it and move on. If you can’t get yourself to call and deal with your issuer, then find another credit card company and transfer your balance. Some cards have a balance
transfer of 0% for 12 months or longer.
Low rate vs. rewards—which is best for you?
This is simple. If you carry a balance, get the lowest interest rate possible and forget about rewards. Since reward cards typically have higher interest rates, the few points/miles/dollars that you earn do not offset the higher rate and the additional money you make in interest payments. Your only goal with your credit card should be to pay off your balance.
Paying off your balance each month opens up the world of rewards. Now, you will be able to get “something for nothing.”
How does your credit score affect your interest rate?
The higher your score, the lower your interest rate. The lower your score, the higher your interest rate. To get the best rates, your credit score should be 720 or higher (FICO).
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