Your Credit Card’s Ongoing APR Shouldn’t Matter

If you pay your balance off each month, then the ongoing APR doesn't make a difference.
Kevin Cash
By Kevin Cash 

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When shopping for a credit card, many people look for a card with a reasonably low annual percentage rate. The reason: A low APR means they'll pay less in interest if they carry credit card debt. The Federal Reserve reports that credit card accounts that accrued interest were charged an average APR of 20.92% interest in the first quarter of 2023, which means holding a balance from month to month can amount to a substantial added expense.

But if you pay your bill in full, the APR shouldn't matter. Here's why not carrying a balance is your best bet, regardless of your APR.

Carrying a balance means paying interest

The most tangible benefit to paying off your credit card bill in full every month is avoiding interest. Paying interest is a widely accepted necessity when financing larger purchases like automobiles and homes, but doing so for smaller purchases on credit cards is preventable and should be avoided. This isn't as hard as it sounds. It usually requires paying more attention to your spending habits.

For starters, don't spend more than you can afford. Sometimes you'll face emergencies where a credit card is the easiest and perhaps only way to pay. But some credit balances grow for simple lack of attention.

Designing a budget around your spending categories is an easy way to keep track of your spending. Holding yourself to a fixed amount on certain kinds of expenses can temper your spending habits. As an added reminder, you can set up account balance alerts through your credit card.

Carrying a balance cancels out the benefit of rewards

Carrying a balance from month to month usually outweighs any points, miles or cash back earned from spending on a rewards credit card.

When choosing a credit card, it's common to take rewards and bonus offerings into consideration. Finding a rewards card that matches your lifestyle can save you money on purchases travel, groceries and gas.

But paying interest on a balance can quickly wipe out any rewards you may have racked up. For instance, if you spend $3,000 on travel with a card that earns 2% cash back for that category (earning $60), carrying a balance for just a few months at a 20% APR eliminates those rewards earnings. If you pay off your balance in full every month, those rewards won't go to waste.

Carrying a balance can hurt your credit score

Not paying off your balance can put your credit at risk. A high credit card balance can influence your credit utilization ratio, which represents 30% of your FICO score. Two components make up your overall credit utilization ratio:

  1. The ratio of credit used on an individual credit line to total credit available on that individual credit line

  2. The ratio of total credit in use on all credit lines to total credit available

In both cases, experts recommend you keep your credit utilization ratio below 30%. When your credit utilization ratio increases above that level, your credit score usually decreases. This number is calculated and reported to the credit bureaus monthly, but the day can vary from issuer to issuer. By calling your issuer's customer service line, finding out which day they report, and paying your balance before this date, you can prevent a high utilization ratio from dampening your score.

The bottom line: You won't have to pay credit card interest if you don't carry a balance. Paying off your balance in full every month saves you money and contributes to your overall financial health.

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