by Maurie Backman | Updated July 21, 2021 - First published on Nov. 19, 2019
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Hint: It's an important one.
In an ideal world, the interest rate attached to your credit cards wouldn't matter because you'd pay your bills in full every month. In reality, however, many Americans routinely rack up credit card debt by carrying a balance.
Anytime you fail to pay a credit card bill in full, you pay some amount in interest. That interest is determined by the rate your card charges.
But a surprising number of Americans are clueless as to what that rate is. According to Northwestern Mutual's 2019 Planning & Progress Study, 19% of U.S. consumers don't know what their credit card interest rate is. If you're one of them, consider this your wake-up call to dig into that crucial piece of information.
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Simply put, a higher credit card interest rate will cost you more money than a lower one when you're forced to pay off debt over time. Imagine you rack up $1,000 in credit card debt that takes a year to pay off. If your card has an 18% interest rate, you'll pay just over $100 in interest. With a 12% interest rate, you'll pay $66 in interest.
That may not seem like a huge discrepancy, but keep in mind that many Americans carry far more than $1,000 in credit card debt and that it takes many consumers a lot longer than 12 months to pay their debt off.
Going back to our example, let's pretend that instead of a $1,000 credit card balance, you're looking at $10,000, coupled with a five-year repayment period. Suddenly, the difference between 18% interest and 12% interest becomes much more significant. With a rate of 18%, you're looking at $5,236 in interest, whereas with a rate of 12%, you're paying $3,347. That's roughly a $1,900 difference -- not a small amount of money by any means.
That's why it's so important to pay attention to the interest rates on your credit cards -- and take steps to lower them.
One of the easiest ways to score a lower credit card interest rate is to shop around for the best offers out there. A little legwork can save you money if you're forced to carry a balance.
Another option? If you're in good standing, you can ask your current credit card issuer to lower your interest rate. Some credit card companies will do so to retain business.
Finally, you can work on improving your credit score, because the higher it is, the more favorable an interest rate you'll be eligible for the next time you apply for a credit card. You can boost your credit score by paying bills on time and paying off existing debt to lower your utilization, which is the amount of available credit you're using at any given time.
There are some details in life that you can afford to ignore, but your credit card interest rate isn't one of them. Commit that number to memory so that if you wind up carrying a credit card balance, you understand exactly how much it will cost you.
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