Understand the Interest Rate on Your Credit Card

Credit card interest rates can be a tricky business. Yours may start low then go sky high after a few months. Your rate can also change if you pay late, charge beyond your limit, perform a balance transfer, or get a cash advance.

Many card issuers will entice you with a 0% introductory rate and then raise it after a few months, hoping you’ll continue to use the card and carry a balance. They don’t want you to pay it off in full because then they can’t charge you any interest and that’s when they make money.

💡Here’s a quick tip for building good credit habits: pay off your balance every month so it doesn’t cost you anything to borrow the money.

So what exactly is an APR and how is it calculated?

Here's an overview to enhance your personal finance education and knowledge:

APR, or Annual Percentage Rate, is the interest charged on carried-over balances. Card issuers base your interest rate on several factors, including your income, assets, current debt load, credit inquiries, and payment history, which is why it’s so important to establish good credit habits and build a solid credit history.

Some cards come with a fixed-rate APR, which means the interest rate stays the same the entire time you have your credit card. A variable APR is tied to an index (often the prime lending rate, which is set by the Federal Reserve) and can change periodically. A fixed-rate card may be the better option because there won’t be any surprise rate hikes.

If you carry a balance month to month, the lower the interest rate, the better.

Interest is calculated by averaging the daily account balance, then multiplying that figure by the daily periodic rate (APR divided by 365) and then again by the number of days in the billing cycle for that month. If your average daily balance is $500 and your APR is 8.49%, you would be charged $3.45 in interest for a 30-day month.

How much will credit cost me?

Let’s look at what a difference the interest rate can make when you carry a balance on your credit card. Let’s say you have a $3,000 balance and you’re required to make a minimum payment of 2% of the total balance each month. (That percentage is pretty typical of most card issuers.) Here’s what two credit cards with different rates could cost you if you only make the minimum payment each month:

Balance	Interest Rate	Pay Off Time	Total Interest Paid
$3,000	8.49%	251 months	$1,517.96
$3,000	14.99%	397 months	$4,483.23

A card with a lower interest rate could save almost $3,000! Even if you plan to pay off the balance every month, a card with a low rate can be insurance if you ever do need to carry a balance.

Fortunately, laws have been passed to inform and protect consumers. In the past, most people had no idea what they were paying in interest and what a minimum payment was costing them over time. Armed with this information, today's consumers can save thousands of dollars simply by paying more than the minimum payment due.

💡Here’s another tip: If you can’t pay your balance in full, always pay more than the minimum amount due.

There are so many choices when it comes to credit cards and your mailbox is probably full of offers almost every day. If you’re in the market for a new card, do some comparison shopping (Hanscom FCU offers a great low-rate Platinum Mastercard). Carefully check out credit card interest rates and read all the fine print to see under what circumstances your rate can be raised. Our 20-Something's Guide to Savvy Credit Card Ownership even includes a handy worksheet that lets you compare cards!

There’s no doubt that credit cards are convenient, especially when you've got an emergency to pay for or you’re short on funds. Look for a card that charges you as little as possible for that convenience.