Interest on a credit card can be a significant concern for many people. However, it’s essential to understand how the average interest rate charged on credit cards works and what you can do to reduce your overall cost of borrowing money.
What Is the Average Interest Charged On a Credit Card?
The average credit card interest rate is about 16-18%. This number varies based on your credit score and the interest rate offered by your bank. If you have bad credit, expect to pay higher rates than someone with good credit.
If you’re looking for a loan, it’s best to look at options besides a credit card because their interest rates are generally much higher than other types of loans, such as mortgages or student loans.
How much interest you pay, it costs you over time and creditworthiness?
How much interest you pay – and how much it costs you over time – depends on your creditworthiness. Your credit score can significantly impact the cost of borrowing money. If your score is poor, expect to pay more in interest than someone with a stellar rating.
As mentioned earlier, what determines your creditworthiness is a combination of factors:
- whether you have enough money in the bank to cover payments if they’re due
- your length of time on the job (lenders view stability as one of the best indicators)
- if you’ve ever had to file for bankruptcy or make other significant debt-repayment arrangements
- Whether there are any liens against your property that might indicate financial mismanagement.
Credit card interest rates are set based on several factors
When you apply for a credit card, you can expect to pay an interest rate based on several factors. These include your:
- Credit score
- Amount of available credit
- Length of your history with the credit card issuer
- Type of account (and whether it’s been used for personal or business use)
“Some credit cards offer an introductory 0% interest rate. But once that promotional period ends, paying your balance in full each month is how you can avoid interest charges,” warn SoFi financial advisors.
The higher your credit score, the lower your interest rate
Credit scores are based on various factors, but they all boil down to one simple idea: whether you have paid bills on time, not maxed out your credit cards and not defaulted on them. If you’ve done these things consistently over time and responsibly, you will likely have a good or excellent credit score as defined by the three major credit bureaus (Equifax, Experian and TransUnion).
If you’re curious about what exactly goes into determining this score and how it’s calculated, check out this guide from Investopedia for more details.
However, you might have to pay 25% APR or more if your credit score is fair or poor.
Your credit score is a measure of your creditworthiness, and the higher it is, the better. The best interest rates on credit cards will go to those with the highest scores. If your score is fair or poor, however, you might have to pay 25% APR or more—which can make it very expensive to use a card like this!
Credit card interest rates are set based on several factors, including your creditworthiness and the type of credit card you have. If you have a good credit score or higher, you probably won’t pay much interest. However, if your score is low or fair, then it’s likely that you’ll pay higher rates of up to 25%.