Your credit card’s annual percentage rate, or APR, impacts how much interest you pay when you borrow money. Because most cards have variable APRs, your rate may fluctuate based on the prime rate or your credit habits.
With rates broadly expected to increase as the Fed continues to tighten monetary policy, it’s more important than ever to know what can increase your credit card’s APR.
Explaining APR in credit cards
With credit cards, the APR is similar (often identical) to the interest rate. Let’s explain.
In the lending world, your interest rate is just the rate you pay to borrow money. APR is more comprehensive. It lumps your interest rate and other fees (like closing costs and mortgage insurance) into a single number.
But since most credit cards don’t regularly charge additional fees, your interest rate and APR may be the same.
Additionally, credit cards can have up to three variable APRs: one each for balance transfers, purchases, and cash advances. Your personal APR will vary based on the card, the benchmark prime rate, and your creditworthiness.
What increases APR in credit cards
Your credit card’s APR fluctuates based on several factors. While some fall under your control, others, sadly, do not.
The prime rate increases
Credit card issuers calculate each person’s APR by adding together two numbers.
The first, the prime rate, is a benchmark interest rate that fluctuates with the federal funds rate. When the Federal Reserve changes the federal funds rate (those “rate hikes” in the news), the prime rate rises, too.
The second is a personalized interest rate based on your creditworthiness, which can range from around 10% to over 25%.
Unfortunately, that means that when the prime rate goes up, your credit card’s APR will rise, too. (Even if your creditworthiness hasn’t changed.)
Your promotional period ended
Many credit cards now offer low- or no-interest promotional periods to entice consumers to sign up. By law, these offers must extend at least six months, though some last 15 months or more. Once your promotion ends, your APR will switch to its “usual” rate based on the factors above.
Your credit score may have dropped
Credit card companies regularly monitor users’ creditworthiness, including your credit score. If your score recently dropped, your issuer may decide that you’re a borrowing risk and raise your APR to compensate.
That said, federal law requires your issuer to send you a rate raise notice at least 45 days in advance. These may appear in your mailbox, email inbox, or on your credit statement, so review any correspondence carefully!
Fortunately, there’s some good news here, too. If your issuer raises your APR based on your credit score, they must review your account again in six months. Assuming your score improves, they must consider lowering your rate to its “normal” range again.
You’re 60 days late on payments
Card issuers may also raise your APR if you fall 60 days or more behind on your payment schedule. This is called a “penalty APR,” and fortunately, it’s not necessarily forever. Once you make six monthly on-time payments, the issuer must revert back to your standard APR.
You took out a cash advance
Cash advances come with their own (typically higher) APRs, aside from your regular APR. Be wary of using cash advances, as you may activate this higher APR until you’ve repaid the cash loan.
What to do if your credit card’s APR increases
Knowing that you know what increases APR in credit cards, you can better prepare for when (not if) it happens. While you don’t necessarily need to cancel your card due to higher interest rates, you may need to alter your credit habits.
Limit your spending
Limiting your spending is perhaps the most obvious way to address an APR increase. By putting less on your card, you take out less debt for your issuer to charge interest on.
Pay down outstanding credit card debt
Another way to take the sting out a higher APR is by lowering your existing credit card balance. The less debt you owe, the less interest you’ll pay long-term.
Pay your credit card bill in full
When you repay your full monthly credit card bill, the lender has no balance to charge interest on. If this describes you, fortunately, your habits may not need to change at all.
Consider a balance transfer card
If your APR goes up and you have an existing balance, you might look into balance transfer cards. Many come with low- or no-interest promotional periods that can save you hundreds or thousands in interest over time.
Consider a debt repayment plan
If you’re already struggling to repay your credit cards, an APR increase might be the last straw. In this case, a debt repayment plan can get you back on track. Many nonprofit credit counseling agencies offer help with structuring and sticking to debt repayment plans to manage your expenses and repay your debt quickly.
How your credit score affects your credit card’s APR
Your credit score is a three-digit number that measures your creditworthiness (borrowing risk). The higher your score, the less risk you pose of defaulting or missing a payment – music to a creditor’s ears.
Generally, card issuers don’t advertise which credit scores will give you a specific rate. Instead, they disclose a range of potential interest rates with each card offer (for instance, 12.99% to 25.99% APR).
When you actually apply, the issuer will determine your specific APR based on your credit score. Your credit report, debt load, and income level may factor in, too.
Usually, your final APR will land somewhere in the middle of a card’s advertised APR – though where you fall varies. As a rule, you can expect to pay lower APRs with a high credit score, and higher APRs with a low credit score.
Worried about what can increase your credit card’s APR?
Don’t be! Now that you know what increases APR in credit cards, you’re better equipped to navigate how and when to use them. Just remember the lower your balance, the less interest you’ll pay, no matter what the APR.
Why did my credit card APR increase?
Several factors can contribute to a credit card APR increase, like a rising prime rate, missed payments, or lowered credit score.
What is a bad APR for a credit card?
A “bad” APR is somewhat subjective, as many higher-rate cards compensate with perks like cashback. But generally, a mid-20s APR is considered high, while rates over 30% are considered bad.
How much will credit card interest go up if the Fed raises rates?
The exact rate increase will vary by lender. Usually, credit card APRs increase near the Fed range. So, if the Fed raises rates by 2%, your credit card APR will likely rise around 2%, too.