Understanding credit card debt interest rates will help you to prioritize and pay it off faster.
When it comes to credit card debt it helps to know which ones you should pay off first. Hopefully you what ones have the highest interest rate, but do you know about all the fees & penalties that compound against you?
Credit cards in general have super high interest rate.
The American Express Gold Card has an annual interest rate of 22-25%, but it can go up to 29.9% with Penalty APR (when it applies).
Personally I they should teach a class about credit cards in high school and again in college.
In any case, knowing the types of interest rates and they can compound is worth knowing for the future. You don’t have to be an expert on it, but if you take 10-mins you’ll know more than 90% of Americans; many of whom struggle to get out of debt.
Below I detail everything you need to know about APR interest rates and credit card debt.
What Does Credit Card APR Mean
To be technical, APR stands for the “annual percentage rate”.
Most of the time it applies to hear it relate to a mortgage or home equity loan. That’s because APR includes the annual interest rate and much more.
- Broker commission
- Home closing costs
- Mortgage insurance
- Loan origination fees
- Discount points
Credit card APR is similar and includes the stated interest rate, plus all the annual fees: yearly fees, transaction costs (when traveling), and penalty fees. American Express charge cards for example can incur a “Penalty APR”.
Penalty APR: an increased annual interest rate due to late payments.
This is why a credit card APR is higher than the interest rate. In some case the APR can be up to 25% higher than the rate that’s prominently shown online.
Types of Credit Card APR
As might guess there are a multiple variations of credit card APR. If you read the fine print you’ll find that a lot of the most popular cards come with all types of APR rate increases. Each card is different and terms vary on how long an APR can be applied
Below are five types of credit card APR.
- Introductory APR: This type of APR gets applied for a limited time right after you open an account. It’s usually much lower than the standard APR for Purchases in order to entice you to sign up for a card.
- APR for Purchases: Standard APR that gets applied to credit card debt interest rates when making a regular purchase.
- APR for Balance Transfers: A type of APR that is applied when you use a low interest credit card to pay off a higher interest card. A balance transfers is the best DIY debt consolidation option for consumers.
- APR for Cash Advance: This type of APR is applied when you take out a cash advance loan on your credit card.
- Penalty APR: The new rate that a credit card company will apply for late or missed payments. Depending on the card you have a Penalty APR can also apply if your payment is less than the minimum or if you exceed your credit limit.
Credit Card Debt Interest Rates
For those with a lot of credit card debt, paying the minimum amount each month means that you’re basically paying off the interest rate, not the actual debt. APR debt compounds quickly and gets even worse if you miss a payment or exceed your spending limit.
If your interest rates are too high to make progress with bigger payments, then you also need to consider consolidating to reduce the interest rate. This is crucial because by lowering your annual interest rate, more of your payments go to your actual credit card debt.
For credit card debt interest rates we suggest using an online debt calculator.