What is a good credit card interest rate?
Credit card interest rates are dependent on your financial history, current market rates, and the individual card issuer. Whenever you apply for a credit card, a hard inquiry will be processed and the credit card issuer will obtain your financial history. They will use this information to determine your creditworthiness and establish a baseline for your interest rate. Their algorithms then combine all of these factors and disperse your credit card interest rate.
Unless you plan on paying no credit card interest (which you should!), your rate can have a large impact on your personal finances. Credit card interest is one of the largest forms of debt for Americans, with consumer debt racking up almost $14 trillion (this includes all sources). More specifically, the average household credit card debt is $5,700. When you start adding interest on top of that, you can fall into a hole that is nearly impossible to get out of.
What determines credit card interest rates?
As we mentioned, there are several factors that determine your credit card interest rate. We’ll uncover each of them in detail below.
Your credit score is the largest factor in determining your interest rate. Credit scores range from 300-850 points. A score above 700 is considered “Good” and will offer better interest rates than an individual with a credit score of 500.
Your credit score is represented through three credit bureaus: Equifax, TransUnion, and Experian. Each of the credit bureaus determines your credit score slightly differently. Typically, your credit score will be an average of the three.
Each year, you are entitled to one free credit report that does not come with a hard inquiry. You can request yours here.
Making sure that your credit is in check before applying for a credit card is always a good idea. Certain cards have minimum credit scores that you need to get approved, so it’s always wise to research what credit score is needed first.
Your credit will take a hit when applying for a new credit card because of the additional hard inquiry, so it’s a good idea to ensure you are not applying for a mortgage or car loan around the same time.
The next largest factor in determining your interest rate is market conditions. If you’ve ever heard of the Fed “raising rates” or “lowering rates”, this can impact your credit card interest rate.
Whenever the Fed lowers rates, your credit card interest will go down. Whenever they are raised, they will go up. The reason for the changes in interest rates is to keep inflation at a moderate rate.
Because you cannot control market conditions, you can decide to wait until the conditions are right for you. However, there is no guarantee whether rates will rise or decline, so it’s a risk you must be willing to take.
Credit Card Issuer
Credit card issuers decide what interest rate they want to charge (within federal regulations). These can vary slightly between issuer and type of card. You can always research your potential cards' interest rate before applying. You should receive a range of prices that will be determined based on the above two factors.
What is the average credit card interest rate?
To determine what a good credit card interest rater is, you must be aware go the average. In America, the average credit card interest rate in 2019 is 19.21% for new credit cards according to Wallethub.com. For existing lines of credit, the average is 15.1%.
Like we’ve mentioned, market conditions are a factor in this. In the past few years, rates have been increasing as the Fed acts to counter rising inflation. But more recently, rates have been on the decline which is reflected in credit card interest rates.
What is a good credit card interest rate?
Now that you know what factors determine credit card interest rates, how will you know whether your rate is good? It’s simple, we’ve done the work for you!
If your credit score is considered “Fair” (Below 670), anything below 25% is considered good.
If your credit score is considered “Good” (670-740), anything below 15% is considered good.
If your credit score is considered “Excellent” (740+), anything below 12% is considered good.
Whatever your credit card interest rate is, it’s always wise to keep your balances low to avoid paying any amount of interest. Keeping your credit score in check and paying down your balances are the best ways to get a lower rate. Before signing up for a new credit card, be sure to shop around for the best rates to help you save on your credit card interest.
Learn more about personal finance here!