Understanding Interest Rates

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Understanding Interest Rates

Understanding Interest Rates

Understanding Interest Rates

When you have a credit card or some other form of credit, it is important to understand the different interest rates and what they mean for your finances. For credit cards, the interest rate only truly matters if you aren’t able to pay your statement off in full each month. For the majority of people, however, the idea of carrying multiple credit balances at one time is not uncommon.

It is always helpful to be aware of what interest rates mean and how they can affect you.

A Quick Refresher on Interest

Interest is a percentage of a loan balance that must be paid periodically to a lender for the use of their money upfront. The amount of interest is typically quoted using an annual rate. However, interest can be calculated for a variety of periods, many of which are shorter or longer than the standard year.

Understanding Interest Rates

Understanding Interest Rates

APR and ADPR

Typically, credit card interest rates are expressed in APR or Annual Percentage Rate. The annual percentage rate is the interest that one would pay over one year. Yes, it is quite confusing, as the interest rate on purchases made with a credit card is charged daily whenever you carry your balance from month to month.

This is why we end up looking at the ADPR or Average Daily Periodic Rate. The average daily periodic rate is an interest rate you are being charged every single day. You get the number by dividing your APR by 365.

Average Interest Rates

The average credit card interest rate as of October 2020, according to the Balance.com, is 23%. With that said, many credit card issuers set their APRs much higher. It is not uncommon to see interest rates as high as 29.99%. Even for consumers who have great credit, a credit card with a 20% interest rate is pretty standard.

We typically see much higher interest rates on credit cards for those who have bad credit or for those who have penalties due to late payments in the past. It is also possible to get penalized with a much higher interest rate if you default on a different account with the same bank or spend more than your credit limit.

Why You Should Ask For A Lower Interest Rate

One of the best tactics to save some money and pay less, in the long run, is to give your credit card issuer a call and ask them if they could lower your APR. This “credit hack” is so incredibly easy, yet most people don’t take advantage of doing so. A look at popular surveys tells us that the majority of consumers who ask for lower interest rates are typically successful in doing so.

Avoiding High Interest Rates

One of the best things that you can do to keep your interest rates low is to continue to pay off your credit cards on time. If you act as a good borrower, your financial institution will recognize that. Plus, your credit score will thank you in the long run.