CreditCards.com

Living with credit

Not knowing your interest rate can hurt you

Fred Williams

Quick, what’s the rate on your credit card?

If you know without peeking, you’re doing well. Many people are stumped by the question, including some who work here at CreditCards.com.

Me, for example. I guessed about 16 percent, but my Capital One statement informs me that, if I have to carry a balance, my rate on purchases will be 17.9 APR.

That’s pretty close. But I did worse with a travel card that I got more recently. It charges 14.99 percent. My guess? I had no real clue. I got it for the rewards and sign-on bonus and never checked the APR. It could’ve been 25 percent, for all I knew.

What’s your rate? It’s a simple question that can expose financial doubt and miscalculation. The average card charges 12 percent, according to the Federal Reserve. Considering just people who carry a balance, the average is 13.5 percent. But how many people consider the market price when they shop for a card?

A consumer poll in Ireland got me thinking about this. There, 71 percent of people in the 25-to-40 age group had no idea what the interest rate was on their credit card, according to the story in the Irish Independent. People in my generation did better: About half of people over 40 said they knew their rate.

So I took an informal poll here in the newsroom at CreditCards.com, where we write about credit every day. Most of us guessed within a couple points of our actual rate, even those who use chiefly debit. Some figured their rate would be favorable because of their good credit score, which is not a safe assumption.

Most people don’t pay interest, so the rate seems unimportant to them. About 6 out of 10 people in the Irish survey said they pay off the balance monthly. In the U.S. the split is about the same, with 60 percent using their card as a convenient tool for buying stuff. These cardholders are called “transactors.” They probably know the ins and outs of their reward program better than their interest rate.

But just because you don’t usually pay interest and don’t intend to in the future doesn’t mean you should ignore your rate. The future can surprise you.

About 270,000 people file for unemployment in the U.S. every week. Thousands more run into big, unexpected bills for health care, car repairs, legal services and other life emergencies. The credit line on their card becomes a temporary lifeline. If you’re like most people, the amount you can borrow on a credit card is greater than your rainy day fund.

For big card issuers with millions of accounts, it’s a numbers game. Every month, some of their cardholders will be racking up interest they didn’t expect to owe. Many of those cardholders will have only a dim idea what the loan is costing them. It’s a little like a casino. You may win for a while, but over time the odds favor the house.

I asked CreditCards.com Editor in Chief Dan Ray, aka my boss, to guess his rates. “I don’t know,” he said, “and I don’t care.” Which is what transactors say. He guessed APRs of 11.9 percent and 15.99 percent on his two main cards. The actual rates were lower, at 9.99 percent and 14.9 percent.

That’s pretty reasonable, so you’re probably OK, boss. For most of us, however, not caring about the rate is dangerous. If the unexpected occurs and you need the card to tide you over, don’t expect to negotiate a lower interest rate. The time to manage your exposure to card interest is before you need the money.

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