How to Compare Credit Card Interest Rates

Understanding APRs and Interest Rates

Credit card interest rates are expressed in terms of APR, which stands for Annual Percentage Rate. This is the interest rate expressed in terms of a year. There's no difference between a card's interest rate and its APR. A year is just a standard unit of time used to measure interest rates, like the term "miles per hour" is used to represent speed.

Where You Can Find Credit Card Interest Rates

As you drive down the street, it's pretty easy to compare the price of gas between different service stations. Every gas station displays its current price per gallon for each grade of fuel, and you know that it will always be the price that you'll pay at the pump.

Unfortunately, it's not as easy to compare credit card interest rates. You won't find these rates on large signs outside of your bank, and you'll even have to search a little to find all of the rates online. And when you do find a card's terms and conditions online, you'll see several interest rates, each for a different type of balance.

When you're shopping online for a new credit card, you need to look for a link to its terms and conditions, which is sometimes labeled Rates and Fees. By law, financial institutions are required to provide this information in a standardized table. In fact, even the size of the typeface is regulated, so that credit card issuers can't bury this important information in fine print. This table is often called a Schumer Box after New York Senator Charles Schumer, who championed the provision requiring it. The first part of this table will be titled Interest Rates and Interest Fees, and it will have several sections.

How to Calculate an Interest Rate on a Credit Card

While it's not that hard to find a credit card's interest rate, it will take a little work to calculate the interest charges for a particular card. First, you have to determine the card's daily periodic rate by dividing the APR by 365 (days in the year). Next, you'll need to calculate your account's average daily balance. That's the total of the daily balances that you had on each day of your statement, divided by the number of days on your statement.

Next, multiply the account's average daily balance by the daily periodic rate. Finally, multiply it by the number of days in the billing cycle. For example, let's say that you have an account with an APR of 15% and an average daily balance of $1,000. Your daily periodic rate will be 15% divided by 365, or 0.00041. If you multiply your periodic daily rate (0.00041) by your average daily balance of $1,000, you'll get $0.41. Essentially, you're incurring 41 cents of interest per day on your $1,000 average daily balance. Multiply that by the number of days in the billing cycle, and you'll have your monthly interest charges. So if you have 30 days in this month's statement cycle, then you'll incur about $12.33 in interest charges each month.

That is, until you factor in compounding interest daily. Most credit card issuers will add interest charges from the previous day into the next day's balance. This will have a small but significant effect of incurring even more interest charges, as your account's daily balance will increase by adding interest on the previous day's balance. For more information, see "How Does Credit Card Interest Work?"

Types of Credit Card Interest Rates

Purchase Annual Percentage Rate

At the top of this table will be the interest rate for purchases, often referred to as the Purchase Annual Percentage Rate (APR). This is the interest rate that applies to all the purchases that you make with your card. With many credit cards, the first number you see will be a promotional rate, which is only available for a limited amount of time. For example, a credit card may offer "0% intro APR for the first 15 billing cycles that your account is open." Below that introductory rate, it will show the standard interest rate for purchases, which only applies to your existing balance after the introductory rate expires.

Balance Transfer Annual Percentage Rate

Beneath the purchase rate you see will see the rate for balance transfers, also called the Balance Transfer APR. This is the rate that will apply to any balance that you transfer from another credit card. Here as well, you could have a 0% introductory rate, followed by a standard rate.

Cash Advance Annual Percentage Rate

Next will be the Cash Advance APR, which is the standard interest rate that applies to any cash you access through an ATM or bank, and some other cash-like transactions.

Penalty Annual Percentage Rate

A penalty APR is a much higher interest rate that only applies when you make a late payment. A card's terms might list a Penalty APR, and explain when it would apply. Rather than trying to compare penalty interest rates between cards, it's best to try to avoid ever being charged a penalty interest rate to begin with. But if you feel that you may still incur the penalty interest rate, then you can look for one of a growing number of cards that no longer have penalty interest rates at all.

Specific Interest Rates Versus Ranges of Rates

When it comes to a card's standard interest rate, or APR, some credit cards simply offer a single number that makes it very easy to compare. When a single rate is listed, all account holders will receive that rate once their application is approved.

But increasingly, many credit card issuers are listing a range of rates, along with the explanation that the rate you receive will be based on your creditworthiness when you open your account. For example, a card may offer a standard interest rate for purchases of 13.99% to 23.99%. This means that if you have an excellent credit history, then you might qualify for a rate as low as 13.99%, while those with fair or average credit may receive a rate as high as 23.99%.

You might also see a range of rates, rather than a single APR, for balance transfers and cash advances too. Finally, there are some cards that might offer three or four possible rates, with the one you receive being dependent on your creditworthiness when you applied.

How to Compare Credit Cards With a Range of Interest Rates

The problem with credit cards that offer a range of interest rates is that you'll never know which rate you will receive until after you've been approved for the card. But if you're comparing two cards that offer a range of interest rates, then you'll typically receive a lower interest rate from a card that offers a lower range of rates than a competing card, as your creditworthiness will determine what rate you receive within the range.

For example, a card may offer rates between 13.99% and 19.99%. If you have good but not excellent credit, then you might expect to receive a rate in the middle of perhaps 16.99%. However, you would probably receive a lower rate from a competing card that offers rates between 10.99% and16.99%.

Variable Rates

Years ago, credit card issuers marketed products with so-called fixed rates. However, card issuers were able to increase these rates at their discretion, which was seen as deceptive. The Credit CARD Act of 2009 now prohibits card issuers from raising rates on cards that promised a fixed rate. As a result, nearly all banks and credit unions now offer rates that are called variable interest rates, rather than fixed. These rates can rise and fall with the prime rate, which is based on the federal funds rate set by the Federal Reserve Bank. This means that the interest rates for nearly all credit cards can potentially rise or fall together, based on monetary policy changes. Fortunately, these changes are usually just a quarter of a percentage point each.

How Your Credit Score Affects Your Interest Rate

Your credit score is a number, based on your credit history, that's designed to estimate the likelihood that you'll repay a loan on time. The higher the number, the more creditworthy you are deemed to be. Instead of offering different cards for people with different levels of creditworthiness, credit card issuers often design cards with a range of interest rates. The rate you receive will vary based on your credit score, but it will always fall within the range listed in the card's terms and conditions.

For example, a card might list standard interest rates of 17.24% to 25.99%, based on the applicant's creditworthiness, and may only be only offered to applicants with good or excellent credit. If an applicant has a credit score of 670, which is at the lower end of the "good" score range, then he or she might receive the 25.99% APR. But an applicant who has an excellent credit score of 800 or above might receive the 17.24% APR.

How to Get a Low Interest Credit Card

If your first priority is to get a credit card with the lowest possible interest rate, then you need to deprioritize other features and benefits. For example, credit cards that offer rewards will invariably have a higher standard interest rate than similar cards that don't have rewards. In fact, the cards with the lowest possible standard interest rates will often be the most simple cards with fewer features and benefits than other cards. For more information, read our post on "What Is a Low Interest Credit Card?" And to compare low interest cards, see Experian CreditMatch™, which matches credit cards to your credit profile.

Compare Interest Rates When Credit Card Shopping

About half of all Americans who use credit cards will incur interest rates by carrying a balance at least some of the time. For these people, it's important to compare interest rates between different credit cards before choosing which one to apply for. Finding the lowest credit card interest rates will never be as easy as spotting cheap gas, but by understanding where to find the rates, and how to compare them, you can choose the best credit card for your needs.