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The average credit card APR was 16.28% in 2020, according to data from the Federal Reserve. But, your own credit card interest rate is likely to be different.
Credit cards come with a cost of borrowing: an annual percentage rate, or APR. This is the amount you’ll pay for credit. With a credit card, you’ll only pay interest on an unpaid balance after your billing cycle is over. Pay off your card in full each month, and you won’t pay any interest.
However, if you don’t pay off your balance in full each month, it can get expensive. It’s not unusual for a card to carry an APR in the 20% range, which means a balance can continue to grow and snowball for each month it stays on your card. According to Experian, consumers had a total of $756 billion of credit card debt in 2020, down from $829 billion in 2019.
Outside of paying off your card, there are a few factors that can influence the rate attached to your card, including your credit score and the type of card you have. Here’s how these factors influence your interest rate.
Interest rates by credit score
Like getting a loan, the interest rate attached to your credit card largely depends on your credit score. Credit scores evaluate your past credit activity on a scale of 300 to 850 based on past borrowing, repayment history, available credit, and your mix of credit accounts.
Lenders use them to evaluate how trustworthy you are as a borrower, and whether they should lend to you, so generally the higher your credit score, the lower your credit card’s interest rate. Those with higher credit scores will also be more likely to qualify for cards with 0% introductory interest rates.
Higher credit scores get lower interest rates
According to data from the CFPB’s Consumer Credit Card Market Report, the average total interest paid by consumers increases with lower credit scores.
The CFPB measures this with an effective interest rate — calculated as the total amount of interest charged per year divided by the total balance at the end of the cycle — to create a metric of how much interest was actually paid by consumers at each credit level. Data from 2018 showed that consumers with the best credit paid the lowest …read more
Source:: Business Insider