An ever-changing APR (Annual Percentage Rate) can be terrifying. Why does your rate change, and what can you do to affect it? There is one primary way that a credit card changes the rate of interest that you are charged and a few different ways that your behavior can play a factor.
How the Economy Affects Your Rate
With a variable interest rate credit card, you will be charged interest based on the current prime rate of interest in the market—the best rate that can be obtained for interest based products in the United States at any given time, and the rate that will dictate the variable interest rate of a particular card.
An example of this would be if the prime rate is 4.0%, then your credit card issuer will add their "spread" to arrive at your interest rate. The "spread" you are given is based on your credit score and other factors, such as income. In our example, the "spread" for your card will be 15%.
This leaves you with an APR of 19%, but with variable rate cards, it won't stay there. The market can change, and the prime rate changes with it. If the prime rate goes to 5%, then your card will follow with an APR of 20%.
Unfortunately, you have no control over this process, but there are a couple ways that the APR is in your hands.
Your Money, Your Control
Your APR is also tied to your payment history in an important way, if you were to miss a credit card payment, your APR would go to the "default" rate. This rate is usually much higher than the rate you were initially given. Credit cards companies are giving you one of their highest rates because they see you as a higher risk of repayment.
The good news is that you have all the power to avoid this situation. Make sure to stay on top of your payments, and pay them on time, every time. This part of changing APR is completely in your hands.
With Good Behavior Comes Rewards
Another way that APR is in your hands is by being awesome and paying on time every time, you can earn a better rate. Most starter credit cards have a higher rate simply because you haven't built enough credit history for them to judge. Luckily, this can be temporary, and proving that you are reliable and pay on time can lead to a better APR.
The trick is to pay the card off every month, on time, and then after six months, you should have a reasonable case for a lower APR. You may be able to call your credit card issuer and just simply ask for a lower rate. The better you are at paying, and the more time that goes by, the better your rate could be.
Your APR Matters
The interest rate helps to determine how much you pay back over time on your credit card balances. If you pay your credit card off each and every month, then you won't pay interest at all. But the balances you carry will be affected by the APR you have.
Whether the prime rate goes up or down, the other factors that affect your APR are up to you. Take control of your finances to give yourself the lowest possible rates and a brighter financial future.