In August 2019, the average credit card rate was 16.97%, according to the St. Louis Federal Reserve.
With a rate of 16.97% and a balance of $4,000, you’ll be charged $56.57 in interest each month.
Credit card interest rates might go even higher, too, as the Federal Reserve raises its benchmark rate. The more debt you have, the more you’ll pay in interest as rates rise.
On this page:
- How Credit Card Interest Rates Are Determined
- Federal Reserve Target Rate & Credit Card Rates
- How to Get the Best Credit Card Rates
How Credit Card Interest Rates Are Determined
Credit card interest rates are set with two tiers. First, credit card rates have a starting percentage point, based on market rates. Next, using the starting point set by the markets, credit card issuers look at personal factors to determine your final APR.
>> Read More: How Does Credit Card Interest Work?
Market rates are usually set using the London Interbank Offered Rate (LIBOR) or the prime rate. The LIBOR is the rate banks charge each other for various periods of time longer than overnight. On the other hand, the prime rate is the APR charged by banks to their most creditworthy customers.
After using the market as a starting point, credit card issuers look at your personal situation, especially your credit score, which is a number between 300 and 850, to determine your interest rate.
A low score indicates that you might have some missed payments or have defaulted in the past — meaning you’re a higher risk for lenders. As a result, the lower your credit score, the higher your APR.
Other interest rates you might see when applying for credit cards include:
- Regular APR: This is your “main” APR. It’s usually expressed as “prime plus.” So, if the prime rate is 5.25% and your credit card rate is prime plus 11%, your regular APR would be 16.25%. As you can see, if the prime rate increases, your variable rate card will see a higher regular APR as well.
- Promotional APR: Sometimes called an introductory APR, this is a lower interest rate offered to you in order get you interested in opening an account or doing a balance transfer. It’s not permanent. After several months, the promotional APR expires and you have to pay the regular APR.
- Cash advance APR: When you get cash advanced from your credit card, many issuers charge a separate interest rate. In many cases, the cash advance APR is above 20%.
- Penalty APR: If you miss a payment or make a late payment, some credit card companies institute a higher APR, sometimes called a penalty APR. This APR can be as high as 29.99%,depending on the card. After six months of on-time payments, your credit issuer must revert you back to the regular APR, as required by the CARD Act of 2009.
One of the best ways to avoid paying interest, no matter your APR, is to pay off your balance each month. Your best management technique is to plan ahead and avoid spending more than you can afford.
How the Federal Reserve’s Target Rate Affects Credit Card Interest Rates
In 2018, the Federal Reserve raised its rate four times, in March, June, September, and December. The Fed funds rate is the rate banks use when they lend money to each other.
In March 2018, the Fed raised its benchmark to a range of 1.50% to 1.75%. By September, though, subsequent increases had resulted in a range of 2.0% to 2.25%. In December, the Fed increased the rate 2.25% to 2.50%.
Despite these increases, the Fed cut rates twice in 2019. In August, it cut rates to 2.00% to 2.25% and in September, it cut rates to 1.75% to 2.00%.
While the Fed funds rate doesn’t directly impact credit card rates, it is strongly correlated to the prime rate, which is used by many credit card issuers to help them set their rates. When the Fed funds rate goes up, the prime rate increases as well.
How to Get the Best Credit Card Interest Rates
The best way to get the lowest credit card APR is to maintain a good credit history.
When you have bad credit, it’s not uncommon to find APRs above 20%. With fair credit, you might see a rate in the upper-teens. Finally, with excellent credit, you might be able to get an APR in the low teens. It can make a difference in what you pay in interest charges each month if you carry a balance.
When you have a good credit score, you can further lower your rate by looking new cards with a low introductory APR. When you have good credit, you have a better chance at finding low-cost credit card offers with good rewards such as high cash back.
Another strategy is to actually call your credit card issuer and ask for a lower rate. If you’re a good customer with good credit, you might be able to convince them to knock a little off your APR, saving you money if you carry a balance.
If you’re hoping to get a better deal, take steps to improve your credit by making on-time payments and reducing your debt. In fact, with interest rates on the rise, it’s probably a good idea to pay down your debt as quickly as possible. As the Fed continues to hike rates — and as the LIBOR and prime rate rise in tandem — debt will become more expensive. Accelerate your debt paydown plan to limit your exposure to higher interest costs.
Author: Miranda Marquit
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