Audit Your Wallet: How to Spot (and Avoid) the Hidden APR Trap
Knowing your APR is a good credit habit, as it can help you devise solutions to save thousands on your debt.
While the best rewards credit cards can help you rack up cash back, points or miles on purchases, they usually come with high interest rates. Your best course of action is to pay your balances in full every month; then, you have nothing to worry about.
However, financial conditions can change, prompting you to carry a balance each month. That's why this one factor, APR, matters a lot. APR stands for annual percentage rate, also known as the annual cost of borrowing money.
I'm going to show how APR works and the ways it impacts your wealth.
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How does APR impact your credit card balances?
Most credit cards operate on a variable rate, meaning the rate can change, often rising or falling in tandem with interest rates set by the Federal Reserve.
When the Federal Reserve Board raises short-term interest rates, interest rates on credit cards and most other lending and savings products increase, such as mortgages, home equity lines of credit, high-yield savings accounts and other loans.
Banks also play a role in what you pay to borrow money. The average credit APR is 19.56%, according to Bankrate. However, if you have a lower credit score, banks might require a higher APR to offset the elevated risk of borrowing.
Other things that can spike your APR include:
- Cash advances: Cash advances come with much higher APRs. This can include payments made from your credit card to peer-to-peer platforms, such as Cash App.
- Credit fluctuations: If your credit score dips from a missed payment, it might prompt your credit card company to raise your APR.
- Paying late: Some card issuers have penalty APRs, which they assess if you are 60 days or more past due on a payment.
Therefore, it's important to keep informed of your card's terms, so there are no surprises.
How does APR affect me?
If you’re carrying a balance on a credit card with a high APR, plan to pay it off as soon as possible without adding any new purchases, or else you'll be stuck with expensive interest payments and could end up in credit card debt.
You should also consider moving high-interest credit card debt to one with a 0% introductory balance if you can make the minimum payments comfortably but not pay off the entire balance.
This table breaks down what it costs to pay off a $5,000 credit card debt in 18 months, with one card carrying a 27.99% APR and the other one having a 0% introductory APR:
APR |
Monthly Payment |
Total Interest Paid |
Total Amount Paid |
0% |
$277.78 |
$0 |
$5,000 |
27.99% |
$342.64 |
$1,167.52 |
$6,167.52 |
As you can see, you'll save over $1,000 just by switching to a 0% introductory rate card. And the lower monthly payment makes paying off this debt more manageable.
Which are the best 0% introductory rate cards? Here are a few to consider:
- Citi® Diamond Preferred® Card: It offers you a 0% introductory rate on purchases and balance transfers for the first 21 months. There's a 3% balance transfer fee on the amount, and you must complete the transfer within the first four months of opening the account.
- Chase Slate®: You'll receive a 0% introductory rate on purchases and balance transfers for 21 months. Chase charges a 5% fee on the transfer amount.
A clever strategy to lower borrowing costs
Another way to tackle interest is to use your card for everyday purchases such as groceries and utilities. Many credit card issuers offer higher cash back incentives when you use your card for travel expenses, groceries, dining out or shopping.
To demonstrate, the Blue Cash Preferred® Card from American Express gives you 6% cash back on grocery purchases for the first $6,000 charged. Once you exceed this limit, it defaults to 1% back.
The key with this approach is to alter how you pay for budget items. Say you have a statement balance of $400, and if you don't pay it in full next month, interest accrues. Instead of using your debit card for groceries and gas, use your credit card and charge these expenses. Once they clear, pay them off immediately.
This approach achieves multiple things: One, it helps you pay off more of your statement balance each month. Two, with the rewards you earn, you could pay off interest quicker in the form of statement credits. Lastly, you're still spending within your budget; you're just altering the payment method you use.
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