How Much More Consumers Pay For Having Bad Credit
After sampling over 100 different credit cards, we found that a benchmark consumer can pay on average of 80% more to pay off their credit card debt if they have a poor credit record rather than a good one. In certain cases, the total card debt more than doubles.
Calculate The Cost Of A Higher APR On Your Debt
The effects of higher APR on credit card debt can be observed at all types of repayment and starting balance. Use this calculator to see how changing the interest rate can affect the time needed to pay off the balance completely and the total interest charged.
Individuals Who Can Only Afford To Make Minimum Payments On Their Credit Card Are Affected Most
We found that consumers making minimum monthly payment on their credit card bill are particularly affected by higher interest charges. The time needed to pay off a debt can increase by as much as 26 months.
Certain Types of Credit Cards Are More Variable In Their Rates
The spread in APR, from lowest to highest depending on credit history, is generally smaller for travel rewards credit cards than for cash back and student credit cards. If you're shopping for a card in a type with more variable APRs, pay greater attention to the interest rates of competing cards.
| Card Type | Low | High | Spread |
|---|---|---|---|
| Student | 13.99% | 22.62% | 8.63 Points |
| Cash Back | 13.24% | 22.99% | 9.75 Points |
| Airline | 14.62% | 21.99% | 7.37 Points |
| Hotel | 15.24% | 21.99% | 6.75 Points |
| Business | 13.12% | 19.87% | 6.75 Points |
| Travel | 15.62% | 19.24% | 3.62 Points |
How Can Consumers Deal With High Interest Rates?
The key to lowering the cost of carrying credit card debt is to minimize the interest rate you pay. Fortunately, the initial APR you’re given when you first open a credit card may be lowered over time. If your credit score improves and if you’ve generally paid your bill on time, you can call your issuer and request a reduction in the rate. Some research suggests that more than 3 of every 4 cardholders who ask for a lower interest rate succeed in receiving a reduction.
Before speaking with your credit card company, make sure you're prepared. Be ready to present some reasons for deserving to have your interest rates lowered. Remain polite and patient with the customer service representative or banker, while also remaining firm.
Turning To Balance Transfer Credit Cards
If your bank refuses to lower the interest rate on your current credit card, you still have the option of using a balance transfer credit card to reduce your debt. These special cards offer 0% introductory rates for some promotional amount of time. The average balance transfer period lasts somewhere between 12 and 15 billing cycles. However, some credit cards today give as much as 24 months of 0% APR. Given how important opening a new credit account is, we encourage you to perform diligent research into your options to make sure you're getting the best deal available to you.
Don't be dismayed by the 3% to 5% fee charged for most balance transfers. You will likely recoup that charge, and more, over time, thanks to the interest savings compared with your original, high-APR card.
When you open a balance transfer card you should also focus your efforts on paying down your outstanding debt. Don't instead view the interest-free period the card provides as an opportunity to make needless purchases. Such indulgence will diminish the value of opening the card, since it will serve to make it harder to pay down the original principal.
More Credit Card Articles & Resources
Methodology
We obtained credit card interest data from our own internal database cards, sampling over 100 cards. The interest rates in the database are current as of 6/20/2017. We then extracted the lowest and highest possible credit card APRs for each card. Most cards already list the interest as a range (i.e. 12% - 24%). Wherever the interest rate was a list (12%, 15%, 17% or 24%), we took the highest and lowest interest rate listed as the range.
We modeled credit card payments and interest charges and calculated the interest charges on a month-by-month basis, using a monthly periodic rate to approximate interest charges (APR / 12). In the case of minimum payments, we assumed the minimum payment on the card is equal to 1% of the balance plus last month’s interest charges. This is the most common minimum payment formula among the nation’s leading credit card issuers.
In each model, we assume the cardholder is not making any additional purchases and is simply paying off the balance they have accumulated. While adding new balances wouldn’t change any of the conclusions, it would inflate the interest charges and time needed to pay off debt across all of our benchmarks.
Opinions, analyses, reviews, or recommendations expressed here are the author’s alone, and have not been reviewed or endorsed by the issuer. We may be compensated through the issuer’s Affiliate Program. For a full list of our advertisers, including American Express, see our disclosure page.
Virtually every credit card contract today states that your interest rates will be based on something called your "creditworthiness" -- which is another way of referring to your credit history. It's common knowledge that a bad credit score, resulting from a poor credit history, results in higher interest charges. However, few people realize just how large an impact it can have on overall debt.
Credit-card APRs vary more widely than rates for most other consumer credit products. It's not uncommon for a card's terms to say your APR will be between "12% and 24%." That's a massive range, of course, especially since you won't know your actual rate until after you're approved for the card.
To help quantify the impact on consumers with the worst credit scores, and thus the highest APRs, we reviewed the interest rates for more than 100 credit cards. We found that, in certain cases, an individual deemed to be less creditworthy can pay twice as much in interest as someone who approved for the lowest rates on the same credit card.
Consumers who carry the most debt, or who make just the minimum payments on their bills, will be affected most by paying a higher APR. Qualifying for a card's highest interest rates while making just the minimum payments can increase not only how much you pay, but how long you carry that debt. In some simulations, we found a sample user would require an additional two years to pay off their debt compared with a card holder with better credit who qualified for a lower rate. In part, that difference is due to the interest on credit-card debt compounding on a daily basis, which serves to relentlessly drive up the balance.
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