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Having trouble figuring out what your interest rate is going to be on a new card offer? You have plenty of company.
Online credit card offers that advertise a range of possible annual percentage rates (APRs), rather than one flat rate, have grown increasingly common in recent years, according to fall 2016 research by CreditCards.com. As a result, consumers who shop around for credit are more likely to find several different APRs on any given card.
Of 100 online card offers we surveyed, 80 had ranges instead of a single APR. Most of the web-based credit card offers from major issuers feature APR ranges as wide as 7 to 10 percentage points or more, making it impossible to tell what interest rate you’ll actually get until you are approved for the card. If you don’t like the card’s rate, you can always decline to use it, but you’ve already paid a price: Each application causes a minor hit on your credit score.
“It makes it impossible for meaningful shopping to take place by the consumer,” says Josh Frank, a former senior researcher at the Center for Responsible Lending. “They have no idea what rate they’ll be getting.”
Card offers tough to navigate
The likelihood you’ll be confronted with varying APRs depends on the issuer you’re dealing with and the type of offer you receive. Most credit card offers mailed directly to consumers’ mailboxes, for example, still feature just a flat APR, says Andrew Davidson, a senior vice president at the market research firm Mintel Comperedia. For example, only 24 percent of card offers mailed to consumers’ homes in the second quarter of 2016 advertised multiple rates – up from 22 percent in 2015. Among the cards that advertised a range, the average spread between the rates was just 3.5 percentage points, says Davidson. Mailed offers can be customized more easily than web offers, since issuers can buy postal addresses for people in specific credit ranges.
Card offers marketed online, by contrast, are much more likely to disclose a wider range of APRs because issuers can’t target consumers as precisely. Among the largest credit card issuers, for example, all seven of the biggest issuers publish on their websites a range of possible interest rates for numerous cards.
Some of those issuers, such as Capital One, Citi and Chase, also market a limited number of cards that offer a flat rate APR. For example, Capital One boasts at least seven cards that advertise a single rate. However, most single APR cards are for consumers with lower credit scores or are specialty cards, such as gas or business credit cards. “We provide a range of APRs on credit card offers for people with excellent credit to accommodate the broad range of consumers who are interested in our products,” wrote Capital One spokeswoman Sukhi Sahni in an email. “Our products for people who are building or rebuilding their credit have a single APR,” says Sahni.
Among the 100 cards tracked by CreditCards.com, the vast majority of general-purpose cards advertise ranges as wide as 7 to 16 percentage points.
As of October 2016, the Wells Fargo Cash Wise card, for example, featured an APR range of 13.24 to 25.24 percent – a 12-point spread. The USAA Rewards Visa Signature card featured an APR range of 10.15 to 26.15 percent – a 16-point spread.
Those ranges are not to be confused with variable interest rates. For instance, if you’re approved for a card with an APR of 15 percent, that’s your starting point. If the Federal Reserve hikes interest rates, your APR will rise proportionately.
Consumer advocates say the extrawide APR ranges make the disclosures practically meaningless. “What’s the point of even listing the rate if there’s going to be such a wide range?” says Ruth Susswein, deputy director of national priorities for the Consumer Action advocacy group. “This is very unhelpful to consumers because we need to have some idea if this offer is a good idea, and there’s no way to know if there’s a 10-point range that we’re trying to gauge.”
One advantage to the wide ranges is that issuers may use the same marketing material for a larger number of consumers with different credit scores.
“They may be broadening the group so that they’re including in their target audience a broader range of people,” says Nessa Feddis, senior counsel for the American Bankers Association.
Regardless of why issuers are doing it, the number of card offers that advertise extrawide ranges to online shoppers has grown significantly in recent years, according to CreditCards.com data on new card offers.
For example, among the 100 cards that CreditCards.com sampled:
- 34 cards now feature APR ranges as wide as 10 percentage points or more – up from 31 cards in 2013.
- An equal number of cards – 34 total – now feature a 7-point to 9-point difference between offered rates. That’s up from just 16 cards in 2013.
- 12 cards feature a 4-point to 6-point difference.
- Only 20 cards advertise just one flat rate.
- Among the cards that advertise multiple interest rates, the average APR range is 8.8 percentage points. The median range is 9 percentage points.
Why ranges matter
As with any loan charging an interest rate, just a few percentage points makes the difference between a good credit card and a lousy one. A swing of 10 percentage points is huge: A card with a 10.99 percent APR is a good deal in today’s market, reserved for the most creditworthy. Swing that rate 10 percentage points higher, to a 20.99 percent APR, and it’s become a bad deal, usually offered to customers who have had difficulty paying bills on time.
The wider APR ranges may be due to the fact that issuers are actively courting consumers with lower credit scores again, after shutting them out during the recession. “I think you’re finally seeing credit loosen up a little bit from the 2008 downturn,” says Tom Johnson, business value architect at FICO and a former vice president of product development at Zoot Enterprises.
As issuers compete for fresh business in a crowded market, some are beginning to look beyond prime cardholders with perfect credit. These days, “The prime space is so packed with offers, if you want to grow, you’re going to have to go outside of that prime group,” says Johnson.
According to research from the credit bureau TransUnion, for example, the number of cards going to consumers with lower scores has expanded significantly in recent years. As a result, advertised rates have trended higher, says Mintel’s Andrew Davidson, leading to wider APR ranges on generic offers. The average APR on mailed credit card offers, for example, has increased to 16.99 percent this year, according to Mintel research, up from 15.76 percent in 2015. “Some issuers are becoming more comfortable extending credit to consumers with lower FICO scores and the higher rate offers are driving up the mean APR,” wrote Davidson in an email.
Johnson says that as long as the economy continues to improve, issuers will likely keep APR ranges extrawide in order to accommodate more cardholders. “I think you’ll see wider ranges as long as banks stay stable,” says Johnson.
Narrow your options by planning ahead
So what’s a consumer to do?
First, pull your credit report, says the ABA’s Feddis. That way, you can see where your credit history stands. You can get a free copy of your credit report from each of the three credit reporting agencies once per year at AnnualCreditReport.com. To get your credit score, you can pay about $20 for a FICO score from myFICO.com, visit creditcards.com for a free TransUnion score or visit Discover’s website for it’s free FICO Credit ScoreCard.
Then, try to make an educated guess to narrow a card’s range, says Consumer Action’s Susswein. For example, if you’ve missed a credit card payment in the past, you’re likely to receive an APR that’s closer to a card’s maximum possible rate.
“Upon applying, a customer is offered an APR that is commensurate with their credit score. So the higher the score, the lower the APR,” wrote Capital One’s Sukhi Sahni in an email.
Even if your score is solid, however, don’t assume that you’ll automatically get the lowest rate. Issuers often look at other factors, such as your income, when considering what kind of APR you should get. “We look at individual creditworthiness (ability, stability and willingness to pay) when setting rates,” wrote Bank of America spokeswoman Betty Riess in an email.
Don’t be overly optimistic when making educated guesses, adds Frank. Research shows that we’re biased in the way that we view information and that can color how we react to new card offers, he says.
To guard against this, you may want to take a second look at the card with a narrower range, he says. “Even if it doesn’t look as good, you have more certainty and what you might get might be better.”
You may also be able to get more certainty on an offer if you take advantage of an issuer’s price guarantee tool, such as Capital One’s online prequalification tool, according to Capital One’s Sahni.
Once you’ve made an educated guess about what rate you’re likely to receive, go online and see if you can find a better deal, says Frank. “There are offers out there that are more straightforward,” he says. You just have to find them.
Finally, if you apply for a card and receive a higher APR than you expect, don’t be afraid to turn down the offer and close the card, he says. “Try again,” says Frank. “If you don’t like what you get, don’t take the offer, don’t use the credit card.” If you never carry a balance, the APR shouldn’t matter, but for those who do, a high APR can add significantly to your debt load.
Your credit score will take a temporary hit each time a lender pulls your credit report and if you cancel the card, but the impact should be small and heal relatively quickly.
Editor’s note: Card APRs mentioned in this story may have been updated since publication. See the card issuer’s site for the most current offering.