Interest Rates and Balance TransfersBy Michael Hawthorne
Annual Percentage Rate (Interest Rate)
Rewards aren’t the only benefit attached to credit cards. Since using a credit card taps into a line of credit from a bank there is an interest rate associated with your account that accumulates if you carry a balance from month to month. If you pay off your card balance monthly, you don’t need to worry about the interest rate because it is only charged on balances that are carried month to month. However, for most of us the ongoing interest rate (called APR – Annual Percentage Rate) is an important factor in choosing a card. Currently, the average ongoing APR in the credit card industry is about 15% though we have seen rates as low as 8% (the Barclaycard® Ring Mastercard®) and as high as 30%+.
If you know you’re going to carry a balance then you might want to focus on cards that have a low APR. Many credit cards offer an introductory period of 0% interest that lasts for 6 to 18 months while others offer ongoing APR rates lower than the industry average. You can find our favorite low introductory interest rate cards here.
If you are already carrying a balance on one of your credit cards and want to get out from under a heavy interest charge every month, a credit card with a balance transfer option might give you a chance to get back on your feet. Many cards offer introductory balance transfer rates along with introductory APR rates, giving you the chance to transfer an existing balance from a high interest rate to a 0% or 1.9% rate for 6-18 months. One of the details to keep an eye on with balance transfer rates is transaction fees. Most credit card companies that offer low interest balance transfers will charge you 2-4% of the total transfer amount as a transaction fee up front. This charge is significant and you should consider it, along with your ability to pay off your debts, before you make a balance transfer.
Our favorite balance transfer card is Slate from Chase – it offers transfers at 0% APR for up to 15 months and does not charge a transaction fee! See our other top picks for balance transfers.
* Balance transfers can be a helpful way to reduce your interest expense but they shouldn’t be used to rack up ever increasing amounts of debt.