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Credit cards are a very popular method of paying for items — and with good reason. If you have a rewards card, you can usually earn cash back, points, or miles for the items you buy. Using a credit card wisely and paying it off can also help you to earn a good credit score. And you may be entitled to purchase protections such as extended warranties and return protection when you charge items on a card.

Unfortunately, while cards are popular and can be a great tool if used correctly, many people don’t really understand some key details about their cards that could impact what they do with them. Specifically, there’s one very important fact that close to half of Americans don’t know about their credit cards and that they really ought to pay more attention to.

This is a crucial detail many Americans don’t know

According to a recent study conducted by Ramsey Solutions, close to half of all Americans (47%), do not know the annual percentage rate (APR) that their credit card charges.

APR is the cost of borrowing on a card, including interest and any fees assessed. The higher it is, the more expensive a loan is. And credit card APRs are very high. In fact, according to the Federal Reserve, the average credit card APR is 21.47%.

The fact that so many people don’t really know what their card issuer is charging them is a huge problem because this lack of knowledge may very well lead them to make borrowing choices they otherwise wouldn’t.

It’s important to know your APR before you borrow

Knowing your APR is essential because understanding the cost of debt allows you to make informed choices about whether you want to borrow the money or not. In other words, if more Americans knew they were most likely going to be paying upward of 20% in interest on all of their credit card purchases, they might very well decide not to carry a balance on their cards — especially not for years to come, and especially when there are alternatives out there.

Personal loans, for example, can often be a lot more affordable than credit cards as a method of borrowing. Say, for example, someone wanted to buy something that cost $5,000 but they didn’t have the money.

The table below shows how much that could cost if they used their credit card versus if they opted to take out a personal loan (with an APR of 12.35%, the average in November 2023) that they’d repay in two years. It assumes borrowers would make the same monthly payment toward both debts, even though their credit card minimum payment might actually be lower than that amount.

Interest Rate Monthly Payment Time to Repay Loan Total Costs Over Time
Credit Card 21.47% $236.19 27 months $6,302.15
Personal Loan 12.35% $236.19 24 months $5,668.45

Data source: Author’s calculations.

If you made only the minimum credit card payment, it would be even worse. If you carried a $5,000 balance on a card and made only a minimum payment equaling 2% of the balance, you’d end up paying back the debt for more than 30 years and would pay a total of $27,667.16 over that time.

Knowing your credit card’s APR can help you to see whether you really want to take on the high costs of credit card debt. You can check your cardmember agreement to find out how much you’re paying to borrow. If it’s higher than you’d like — and it probably is — then you shouldn’t stop using your card. Just make the commitment not to carry a balance on it, and to find other ways to fund purchases over time, like cash from a savings account or a personal loan instead.

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