Did you know your credit card comes with more than one interest rate? When’s the last time you checked your rates?
It’s not uncommon to be in the dark about your rates, but it can be dangerous, financially speaking. That’s because the rate you started with could quickly change if you use your card differently than planned.
For example, let’s say you buy something with your no-interest balance transfer card. This would then introduce a purchase annual percentage rate (APR) into the mix. Or maybe you made a late payment on a credit card. This could result in a penalty APR and cause an interest rate increase that’s hard to reverse.
If you’re carrying a balance — or use a credit card at all — read on. Here’s everything you need to know about how many credit card APRs you have and why it matters.
Credit cards come with 4 different types of interest rates
A credit card APR represents how much interest you would pay on a balance if you carry it over each month for a year.
Even if you only know of one APR on your credit card, you could be subject to up to four. It all depends on how you use the card. Here’s a quick snapshot of the four different types of credit card interest rates.
1. Purchase APR
The credit card rate you’re most likely to know about is the purchase APR. This is the annual percentage rate applied to purchases you make with your card. Those purchases include any method of transaction: Shopping in a store, over the phone, or online.
If you only use your credit card for purchases and never make a late payment, this APR is the most relevant to you. According to the Consumer Financial Protection Bureau (CFPB), the average retail APR — another name for purchase APR — is between 15 to 20 percent.
2. Cash advance APR
Do you ever get blank checks in the mail from your credit card issuer? Those checks can be used for a cash advance on your line of credit. But the interest rate will likely cost you a lot more than you think.
Cash advance interest rates are known to go above 24.00%, such as this example from Discover. What’s worse, there’s no grace period.
No grace period means you’re charged interest the minute you process the transaction. That differs from credit card purchases, which give you a grace period — you can pay back the balance without being charged interest.
Meant for use in times of emergency, a cash advance is an expensive way to borrow and shouldn’t be taken lightly.
3. Penalty APR
If you periodically forget to make a payment on your credit card, you might think it’s no big deal. After all, if you have a positive payment history, your issuer might reverse the late fee once you pay.
But one thing they can’t reverse is an increased APR. And that’s just what can happen if you make a late payment.
Penalty rates can also occur if you go over your credit card limit. Either way, the new rate could be permanent. These rates can also be high. Take this example from Chase, which shows a 29.99% penalty APR.
Not all credit card companies charge a penalty APR. It’s important to read the terms and conditions of any potential new credit card.
4. Introductory APR
Finally, an APR that works in your favor. Introductory rates can apply to credit cards in a variety of ways, but one of the most common is balance transfers.
A balance transfer credit card is one that is often used to pay off high-interest credit card debt. Typically, these cards come with no interest for the first six to 12 months. However, balance transfers often come with a fee that’s usually between three to five percent of the amount you’re transferring.
Whether you open a new credit card that offers a 0% introductory APR for purchases or are taking on a balance transfer credit card to pay off other credit card debt, be mindful of the APR end date.
If you lose track and forget to pay your balance off before then, your remaining balance is subject to the new interest rate. And, depending on your new rate, that can potentially balloon a balance from small to unmanageable in a short period.
Remember, the average purchase interest rate is 15 to 20 percent. If you’re carrying a large balance when your introductory rate ends, it will immediately be hit with that new interest rate.
How to find and understand your multiple credit card interest rates
Now that you understand the different types of APR, the next step is knowing where to find yours and how they affect your balance.
How to find your credit card rates
If you’re shopping around for a new credit card, you can find that card’s terms and conditions online. You can do this by searching for the card on the issuer’s website or doing a Google search of the card name. Either should take you to a product page with a link to its terms and conditions.
If you already have a credit card (or cards) and want to find your APRs, look at your paper or online statements. The rates are usually on the last page of the statement. They look something like this:
How credit card APR is calculated
Calculating credit card rates on your own isn’t something you need to do. After all, your statement will show you what you owe. But if you’re curious about how credit card issuers do it, take a look at this formula:
Let’s walk through this formula using an example credit card. The details are as follows:
- APR of 24.00%
- Balance of $2,500
- Billing period of 30 days
If you divide your 24.00% APR by 365 per the formula above, you’ll see that your daily periodic rate is 0.066%. Then, when you multiply the daily periodic rate by the days in the billing period, you get 1.98%. Multiply that by your balance of $2,500, and you’ll see you’re being charged $49.50 per billing period on your current rate and balance.
How multiple credit card rates affect your balance
Now you know how to find and calculate credit card interest rates on your own. The next step is understanding how having more than one can affect your balance.
The main thing to know is how your payments are applied. Your issuer has to abide by the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009. This act dictates that any amount you pay over the minimum must be applied first to the balance that has the highest interest rate.
If there’s money from your payment left over, then that should go to the balance with the next highest interest rate, and so on until the payment is fully distributed.
Fun fact: This requirement mirrors the debt avalanche method for paying off debt. The debt avalanche method suggests targeting extra payments to the highest-interest-rate debt, since knocking that out first helps you pay off debt faster.
Let’s say you have a balance transfer credit card with no interest for six months. Within that six months, you make a purchase, which unlike the balance transfer itself (the money you transferred over from another credit card), carries a higher APR. Any payment amount over the minimum will go to that purchase first.
This is good since the purchase APR will be higher and cost you more money. But if you’ve already calculated how much you’ll need each month to pay off your balance before the introductory rate expires, you’ll now have to re-do your math.
Some simple best practices are to avoid using balance transfer credit cards for purchases and always pay on time. But things happen. If you find yourself accidentally making a late payment or buying something on a balance transfer card, at least you now know what will happen with your interest rate and how to handle it.
Getting control of your credit card debt
Credit cards can be one of the most useful and frustrating financial tools out there. And much of the frustration doesn’t just come down to high credit card interest rates, but also in confusion on how to take control of credit card debt once it gets rolling.
As you think about the best ways to use your credit card (or cards), consider the following:
- Never forget that one credit card can have up to four different types of APR.
- Try to avoid credit card cash advances or using a balance transfer card for purchases — and always pay on time.
- If you think your credit card issuer is miscalculating anything on your statement, use the formula and facts above to check their work. Raise the issue with them if necessary.
And some tips on each of the credit card interest rates:
- Try to pay off purchases before the end of the billing cycle so you can avoid interest charges and debt accrual.
- If you carry a balance on an introductory rate APR, divide the balance by the number of months you have left. This will show you how much you should pay each month to have a $0 balance by the time the introductory rate expires.
- Only use cash advances if you have no other options and need the money. Remember: You’ll be charged the interest on them right away.
Try to maintain these best practices, and you’ll set yourself up to better stay on top of your credit card usage before it turns into unmanageable debt.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|5.81% – 15.37%1||$5,000 - $100,000||Visit SoFi|
|6.87% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|5.49% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|