Having trouble figuring out what your interest rate is going to be on a new credit card offer? You're not alone.
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Consumers' mailboxes are being flooded with new card offers. Some of these offers are simple and just advertise a single flat interest rate to every customer, regardless of their creditworthiness. However, many of those offers feature APR ranges -- sometimes 10 percentage points or more -- that are so wide that it's hard to tell what interest rate you'll actually have to pay until you receive the card.
"It makes it impossible for meaningful shopping to take place by the consumer," says Josh Frank, senior researcher at the Center for Responsible Lending."They have no idea what rate they'll be getting."
Card offers can be tough to navigate
Credit card offers with APR ranges of 10 percentage points or more are unusual, says Nessa Feddis, vice president and senior counsel for the American Bankers' Association trade group.
However, according to CreditCards.com data, roughly half of the credit cards we track feature APR ranges from 6 to 9 percentage points and a quarter of the offers we track feature ranges as wide as 10 percentage points or more. For example, the Wells Fargo Cash Back card features an APR range of 12.15% to 25.99% -- nearly a 14-point spread. And the USAA World MasterCard features an APR range of 9.90% to 25.90% -- a 16-point spread.
That difference in rates can translate into thousands of dollars over the life of a loan. For example, if a cardholder with less than perfect credit borrows $5,000 on the USAA World MasterCard and consistently pays $200 per month at 25.90% interest, they will have to pay a whopping $2,265 in interest to clear the balance. That's $1,642 more than they would have had to pay if they qualified for the lowest APR available on the card. (Calculator: How long will it take to pay off your credit card balance?)
"It's not unheard of to see a wide range," says Lisa Hronek, a research analyst at Mintel Comperemedia, a market research firm that tracks credit card offers.
One third of offers in the past year included multiple APRs, according to research from Mintel Comperemedia. "This could mean that the piece either disclosed more than one rate (i.e. 10.99% or 12.99%) or a range (i.e. 10.99% to 17.99%)," wrote Hronek in an email.
Consumer advocates say the wide ranges make the disclosures practically meaningless. "What's the point of even listing the rate if there's going to be such a wide range?" says Ruth Susswein, deputy director of national priorities for the Consumer Action advocacy group. "This is very unhelpful to consumers because we need to have some idea if this offer is a good idea, and there's no way to know if there's a 10-point range that we're trying to gauge."
Experts say issuers disclose wide APR ranges so that they can offer the same card to a larger number of consumers with different credit scores. "It's a way to provide lower rates for people who have managed their credit well," says Feddis.
Card issuers aren't allowed to check your credit until you've applied for the card and the wider range of possible APRs reduces the risk that they'll offer a lower rate to a consumer with a less than stellar credit history, she says.
Narrow your options by planning ahead
So what's a consumer to do?
First, check your credit history. You can get a free copy of your credit report from each of the three credit reporting agencies once per year at AnnualCreditReport.com. If your credit history looks good, you're unlikely to receive the highest possible APR.
However, don't assume that you'll automatically get the lowest rate. "You can get yourself in trouble if you simply assume you'll get the cheapest APR and end up receiving a much higher rate," says Andrew Schrage, co-owner of the personal finance blog Money Crashers. Small increases in your APR can have a big effect on how much you pay over time.
Instead, try to make an educated guess to narrow that range, says Susswein. You won't be able to pinpoint exactly what you'll be offered. But you can narrow it down by reading your credit report the way an issuer might.
Things you should take into account include your current credit limit, how long you've had a card and how much credit you're currently using. "Issuers do not just consider your credit score," says Schrage. "Rather, they review your overall credit report. Items they are searching for include late payments of more than 60 days on credit cards, medical health insurance bills or loans, bankruptcies and defaults" and how much credit you've been trusted with in the past.
Once you have a better idea of what your credit report looks like, go online and see if you can find a better deal. After all, not every offer has a wide APR range, says the Center for Responsible Lending's Josh Frank. "For example, some credit unions and smaller banks might have a very straightforward offer with one price or just a couple different offers. There are offers out there that are more straightforward." You just have to find them.
"The thing to be aware of is you've got to be a careful shopper," says Nick Bourke, director of the Safe Credit Cards Project at the Pew Charitable Trust. "If there's something in an offer that looks good, it's always possible to research what other companies are providing because it's a competitive market."
It's also a good idea to be aware of your own biases when you're shopping around, adds Frank. "Don't be overly optimistic," he says. There's a lot of research that shows that we're biased in the way that we view information and that can color how we react to new card offers. "Consumers need to be aware that we tend to be overly optimistic and present things in the best light possible," he says. For example, we may overestimate our credit score or expect a better rate than we'll actually receive.
To guard against this, you may want to take a second look at the card with a narrower range, says Frank. "Even if it doesn't look as good, you have more certainty and what you might get might be better."
Another idea is to pick up the phone and ask a customer service representative if they'll give you a firm offer, says Pew's Nick Bourke. "If you're really concerned about what your APR is going to be or what your credit limit is going to be, call the company and talk to them directly rather than just sending in an application online."
Or call your own card company and see if you can negotiate a better rate on the card you already hold. This doesn't work as well as it used to, says Consumer Action's Ruth Susswein. However, it's worth a try, she says. "You might say to them, 'You know, I've been a customer for the past three years and I always pay my bills on time and I'm not satisfied with the rate I have. What can you do for me? Can you lower my rate?' And maybe that's the quicker, easier way to shop around," says Susswein. After all, "if you're someone who pays on time and carries a balance, they will want your business."
Finally, if you apply for a card and receive a higher APR than you expected, don't be afraid to turn down the offer and close the card. "Try again," says Frank."If you don't like what you get, don't take the offer, don't use the credit card." Your credit score will take a temporary hit each time a lender pulls your credit report and if you cancel the card, but the effect will be small, he adds.
The credit score ding is multiplied if you apply for a lot of cards at once, so pause between applications, experts caution. "Unlike a lot of other products and services people buy, you have to think very carefully before you reach out to a company and get a credit card because it can impact your credit score," says Bourke.
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