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Why are credit card APRs so high?

How credit card interest rates are calculated – and what you can do to lower yours


Credit cards are a risky proposition for issuers, and interest rates reflect that. It’s important to understand how APRs are calculated and what you can do to lower yours.

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While mortgage and auto loan rates remain unusually low, don’t expect your credit card rates to fall as well. Unlike your home or auto loan, credit cards are basically unsecured loans, “so there’s no collateral,” says Miriam Mitchell, senior vice president of lending at Addition Financial.

Credit cards are “heavily risk-based,” she says. Default rates for credit card rates are also higher than for other types of loans, Mitchell says.

Despite the much higher rates for credit cards, you can reduce or avoid paying this particular interest. The trick is to take steps to reduce – or eliminate – what you owe on your credit cards.

How are credit card interest rates set?

Credit card interest rates are tied to the prime rate, which is based on the federal funds rate set by the Federal Reserve. According to our sister site, The Points Guy, the federal funds rate is currently 1%, while the prime rate is 4%.

The Federal Reserve slashed the federal funds rate by 0.5% in March 2020 because of the COVID-19 pandemic, and recently it rose to 1%.

Most credit cards have variable interest rates, and the rates may go up or down along with the prime rate.

Why does credit card APR vary?

Your credit card interest rate, as well as the rate on installment loans, is calculated as a percentage of the account balance and then is annualized to determine the annual percentage rate (APR).

The average credit card interest rate stands in stark contrast to the federal funds rate and prime rate, and is currently north of 16.50% APR, according to CreditCards.com’s weekly rates survey.

When the Fed cut rates, many experts expected credit card APRs would drop as well. But that didn’t occur, says Melinda Opperman, president of the nonprofit consumer credit counseling agency credit.org.

“We feel the underlying condition in the economy – the very reason the Federal Reserve is lowering rates – is causing creditors to keep credit card rates high,” Opperman says.

While the Fed hopes to prevent a recession with lower rates, “the mere threat of a recession makes creditors want to keep rates high,” she adds.

With credit cards, “the lender is compensated for taking on risk,” says Jason Vissers, a credit card analyst at MerchantMaverick.com.

How your credit card APR is calculated

Not everything is out of your control.Your credit score and the type of card you choose can influence the rate you pay.

The CreditCards.com rates survey found the average credit card APR was 16.59%. But the average rate for a low-rate card was 13.55%, while the average for a rewards card was 16.41%.

Higher rates “help pay for more lucrative benefits of cards,” such as rewards programs, Vissers says.

Your credit score also plays a major role. Mitchell says consumers with credit scores of 740 and above tend to be offered the best rates on their credit cards.

Your credit score takes into account such things as your payment history, debt level and length of your credit history.

“Consumers with little to no credit history will pay much more than someone who is well-established, with a history of making their debt payments on time every month,” Opperman says.

The card issuer you choose can also impact your APR, Mitchell says, as credit unions often charge lower rates than big banks.

If you pay off your credit card bill each month, the APR your card charges may not matter that much to you. The perks that come with your credit card, such as rewards or insurance benefits, might be more important to you than the APR.

But if you carry a balance, interest charges can quickly mount up – and reduce the value of those other perks.

How to reduce the APR on your credit cards

There are numerous ways you can reduce your credit card rates:

Improve your credit score

If you have a good credit history, you may be able to negotiate a lower interest rate with your card issuer, Vissers says.

If your credit score has improved since you opened that credit card, Opperman says, the issuer might be even more willing to reduce your rate.

The best way to increase your credit score is to make your payments on time each month, she says. Also, double-check your credit report for any outdated or inaccurate information.

“Anything you do to improve your credit should help you pay lower rates in the future,” Opperman says.

Try a balance transfer

Another option might be to transfer your card balances to a balance transfer credit card with a 0% intro APR for a limited time, such as 12 or 18 months, Vissers says. But you have to be vigilant and pay off your balance before the 0% APR period expires, or you’ll begin to pay high rates again.

Balance transfers also typically require you to pay a transfer fee, which is generally 3% to 5% of the amount you are transferring.

However, a balance transfer can backfire if you shift your existing balances to a new card and continue to use your old one, says Opperman.

“We see a lot of people seeking credit counseling who [have] doubled their debt because they transferred a balance and kept borrowing with the original card,” she says.

Find a better credit card

When looking for a new credit card, Mitchell says, you should understand its purpose and how you’ll use it.

Make use of tools such as CardMatch to measure your creditworthiness for certain cards, and compare options from various financial institutions, including APRs, benefits, and terms. “One institution could be very different from another,” she says.

“Shopping for the right credit card is going to be key,” Mitchell says.

Bottom line

Although credit card APRs are higher because of the risk they represent for lenders, you can lower yours by improving your credit score or transferring your balance to a card with a 0% intro APR. Plus, you can avoid interest charges by paying off your balance each month.

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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