What Is a Good Credit Card APR?

When it comes to credit cards, the annual percentage rate is the most important number to know. But what is an APR, exactly? And just as important, what is a good APR for a credit card?

Understanding your credit card's APR and what it means to your bottom line will help you use credit in a way that can save you money. Read on to learn how the APR on your credit card works.

What Is APR?

Anytime you borrow money from a financial institution, you pay interest on the outstanding balance. Credit cards are no exception.

[Read: Best Low-Interest Credit Cards.]

If you carry a balance from one month to the next, you pay interest on the total. Because most credit cards compound interest daily or monthly, your balance fluctuates from month to month, and banks simplify your interest rate as the APR.

The APR represents the interest you are charged over the course of a year. It is also used to calculate the interest you owe each billing cycle.

Credit cards have more than one APR. For instance, you might be charged a different APR on cash advances than for regular purchases. Or if you miss a payment, your rate might switch to a penalty APR. Review your entire credit card agreement, and understand that the APR you pay depends on how you use your card.

How Do Card Issuers Determine Your APR?

Every credit card issuer has its own standards for setting a card's APR. Still, issuers consider two main factors when determining an APR: the prime rate and your credit.

Prime rate. The prime rate is the best interest rate that banks charge their ideal customers. It's closely tied to the federal funds rate, which is what Federal Reserve banks charge each other for short-term loans.

The general economic climate can affect credit card APRs. "Most credit cards have floating or variable APRs, which move with the markets, an index or the prime rate," says Jennifer McDermott, former consumer advocate for personal finance comparison website Finder.

Most credit card issuers use The Wall Street Journal's prime rate as the benchmark for interest rates. A bank sets a prime rate and then publicly announces it, says Yves-Marc Courtines, chartered financial analyst, certified financial planner and principal at Boundless Advice LLC.

The Wall Street Journal then surveys the largest 30 banks and publishes a consensus. "Generally speaking, major banks set their internal prime rate as 3% higher than the federal funds target rate," Courtines says.

McDermott adds that if the prime rate changes, credit cards with variable rates will reset the APR. "The new APR will be the prime rate, plus the bank's margin. So if prime rate is 5% and the bank's margin is 10%, the cardholder will pay a 15% interest rate," she says.

Credit. Card issuers will look at your financial situation to determine your APR. They will review several factors, such as your income, credit and job history. Generally, the higher your FICO credit score, the lower your interest rate.

FICO scores are broken down into the following ranges:

-- Exceptional scores are 800 to 850.

-- Very good scores are 740 to 799.

-- Good scores are 670 to 739.

-- Fair scores are 580 to 669.

-- Poor scores are 300 to 579.

Applicants with very good and exceptional credit scores will usually be offered the lowest APRs. On the other hand, those with fair or poor credit will either be stuck with high APRs or won't be approved for a credit card.

[Read: Best Rewards Credit Cards.]

What Is a Good Interest Rate on a Credit Card?

If you're evaluating credit card APRs, you might be curious whether the rates you're offered are competitive. The average credit card rate is 15.13% as of July 2019, according to the Federal Reserve.

But the type of credit card you choose can make a difference in your APR. For instance, rewards credit cards tend to charge slightly higher APRs because they offer so much value to customers. The average APR for rewards cards, such as cash back and travel cards, ranges between 17.13% and 24.63%, according to U.S. News research.

Store-branded r etail credit cards also tend to charge higher APRs than traditional credit cards. The average APR for retail credit cards ranges from 20.9% to 24.9%.

How Important Is a Good APR Credit Card?

Ideally, the APR on your credit card shouldn't matter much. That's because you should aim to pay off your balance each month and avoid interest charges in the first place.

By not carrying a balance, you can take advantage of valuable rewards credit cards that might charge a higher rate. Or you can open a credit card with an average credit score and not worry about paying higher interest.

Of course, you might need to carry a balance from time to time. In that case, choosing a low-APR credit card is important. Before you open an account, consider your spending habits and how you can use a credit card to save the most money.

How Can You Keep Your Interest Costs Down?

No matter what your credit card APR is, you can find ways to keep interest costs down. Below are a few tips to avoid interest:

Pay off your balance every month. If you do this, you will never pay a dime of interest. But make sure that when you swipe your card, you have the money to cover the bill. And avoid spending beyond your monthly income.

[Read: Best Cash Back Credit Cards.]

Pay on time. Even if you can't afford to cover your balance in full, always pay the minimum by the due date. Missing payments not only harms your credit but also results in a higher penalty APR -- that's more interest you have to pay on purchases.

Usually, penalty APRs apply to future purchases, but if you fail to pay after 60 days or more, that APR might apply to your current balance as well. Penalty APRs range from 22% to 29.99% on average.

Credit card issuers must reinstate your normal APR on your current balance after you make six months of on-time payments. But the penalty rate could apply to future purchases indefinitely.

Take advantage of 0% APR offers. Credit card issuers often entice customers with introductory 0% APR deals. You pay no interest on purchases or balances transferred from another card.

"To really maximize this interest-free period, put a plan in place to pay off the debt before the introduction ends and the regular APR kicks back in," McDermott says. "If that's not possible, take the post-intro APR into consideration when choosing a provider. Otherwise, you could end up with a higher interest rate than your original card and be in a worse situation than before."

Ask for a lower rate. Finally, if you're paying a sky-high APR or simply want to save money on interest, sometimes all you have to do is ask for a better rate.

"Most credit cards will offer to lower your interest rate for a period of time," Courtines says.

He recommends calling a customer service representative and asking politely. Emphasize that you've been a good customer, as long as that's true, and would appreciate a lower rate.

And if the person says no? Call back and try talking to someone else.

Updated on Sept. 17, 2019: This story was originally published on an earlier date and has been updated with new information.

Casey Bond is a seasoned personal finance writer and editor. Her work has appeared in a number of major national publications including U.S. News & World Report, Yahoo Finance, MSN, The Huffington Post, Business Insider, Forbes and others. Follow her on Twitter @CaseyLynnBond.