If you’re shopping around for a new credit card, you’ll see references to APR, or annual percentage rate.
Generally, a “good” APR is one that’s as low as possible. However, if you plan to pay off your credit card balance each month, the APR doesn’t really matter.
What is APR?
The basic definition of APR is the amount of interest the credit card company charges you for the privilege of charging items and paying them off later.
Although APR is set at an annual rate, credit card companies break this down into a monthly charge each time they issue your statement.
They can also assign different APRs for different things. For example, you might pay one APR for balance transfers and another APR for cash advances. If your card imposes a fee for late payments, you might also pay a penalty APR.
If you pay your balance in full with every statement, you won’t pay an APR at all. And because most credit card companies give borrowers a grace period to pay, you can treat your credit card as a short-term, interest-free loan as long as you pay the balance off every month.
What’s a good credit card APR?
What constitutes a “good” credit card APR depends on a couple of different variables, including your credit score.
Generally, if your credit score falls within the good to excellent range—700 and above you’ll have no trouble qualifying for a card with a good APR.
On a wider scale, however, interest rates fluctuate based on something called the “prime rate,” which is the most favorable lending rate banks offer at any given time. As you might expect, they only give the prime rate to customers with excellent credit.
So how do banks set this prime rate? They base it on something called the “federal funds rate,” which is set by the Federal Reserve.
The federal funds rate is the interest rate banks charge on loans they make to each other to satisfy the requirements of the federal reserve.
When the federal funds rate shifts, it affects the prime rate, which influences the annual percentage rates on credit cards. This is why a good APR now might not be such a great deal a year or two down the road.
The Federal Reserve releases the average credit card interest rate quarterly. However, these are broad averages, so they aren’t always a good predictor of what banks will offer you personally based on your credit score.
3 types of credit cards with good APR
If you’re on the hunt for a credit card with a good APR, here are three options to keep in mind as you start your search.
Low-interest cards are ideal if you know you won’t be able to pay off your credit card every month. If you plan to carry a balance, you want to make sure you pay as little interest as possible on it.
Credit union cards
Credit unions are run by and for their members. This is a contrast to banks, which answer to their shareholders.
Credit unions may not typically offer cards with perks like cash rewards or travel miles, but they tend to make up for it by offering lower interest rates.
0% APR cards
Some cards come with no APR. This may sound hard to believe, but keep in mind that most of these APRs expire after a certain period.
Furthermore, cards with 0% APR are usually marketed for a specific purpose, such as a balance transfer.
If you want to move your credit card debt from a high-interest card to one with more favorable terms, it’s worth checking out cards with a 0% introductory APR. As long as you can pay off the balance by the time the introductory rate expires, these cards can be an excellent deal.
Low APR cards with a high annual fee
If you see a credit card offering a low APR, it’s important to keep an eye out for annual fees, as some credit card companies offset their low-interest rates by charging a higher annual fee.
Depending on how you plan to use your card, a higher annual fee may or may not be worth it.
Cards with a higher annual fee combined with a low-interest rate tend to offer perks like cash rewards or travel credits. For example, the American Express Platinum card charges a $550 annual fee.
When you consider the long list of benefits and rewards available to cardholders, however, many of these benefits more than cover the cost of the annual fee.
How to qualify for a good APR
Because your credit score plays a big role in what kinds of interest rate offers you’ll receive, it’s important to do whatever you can to boost your score.
Here are five things you can do to improve your score.
1. Know your credit score
You can’t focus on building good credit if you don’t know what’s in your credit report—or what your score is.
Start by ordering a free copy of your credit report from annualcreditreport.com. Review it carefully, looking for any errors or negative items. If you spot a mistake, dispute it with the credit bureaus.
You should monitor your credit score on a regular basis. You’re entitled to a free copy of your credit report every 12 months, but it’s best to check it more often. Check out our guide to getting your score for free from Discover.
2. Pay your bills on time
Your payment history makes up 35 percent of your credit score. This makes it the most important factor in your score.
If you struggle to remember payment due dates, consider signing up for autopay. Some lenders and creditors even shave a small percentage off your payment if you agree to automatic withdrawals every month.
3. Keep your credit utilization low
Credit utilization is how much total available credit you have versus how much you’re using. This accounts for 30 percent of your credit score, so it can have a big influence on your creditworthiness.
You should aim to keep your credit utilization below 30 percent, and it’s best to strive for even lower than that.
4. Don’t close old accounts
Your credit history is a measure of how long you’ve been using credit, and it makes up 15 percent of your credit score.
When you close an old account, you can remove years of history from your record, hurting your credit score. This is why you should keep old accounts open whenever possible.
5. Don’t apply for too many cards at once
New credit makes up 10 percent of your credit score. If you open a bunch of new cards at once, it can signal to creditors that you’re hurting financially.
Additionally, each new credit card application counts as a hard inquiry on your credit report. When you rack up too many of these, it can lower your score.
Comparing credit card APRs
There are a lot of credit cards out there to choose from, and it’s not always easy to decide which one offers the best fit for your goals and situation.
When you compare credit card APRs, look at the card’s terms overall—not just the APR itself.
Remember that some cards offset a low APR by charging high annual fees. Conversely, a card with a higher annual fee might offer attractive perks and benefits.
It’s a good idea to make a spreadsheet with each card’s terms or print them out so you can compare them side by side. This will help you feel confident that you understand each card’s terms and benefits.
When APR doesn’t matter
If you pay your credit card bill in full every month, you don’t need to worry about APR.
Why? You won’t get charged any interest on the things you buy.
If you’re committed to paying off your card every billing cycle, you can pick the card with the most lucrative perks and benefits regardless of its APR.
As a bonus, making a habit of paying your bill in full every month prevents you from accumulating debt.