There’s no question that credit card interest rates are much higher than most types of loans or credit lines. 

According to data from the Bank of England, the average credit card interest rate in the UK remains well over ~18% in 2021. Unfortunately, these rates tend to be even more outrageous for new cardholders or people with poor credit. But why? Learn more about why your APR is so high here:

What is an APR?

APR stands for Annual Percentage Rate. It refers to the overall cost you will pay over time for your loan or credit balance. Essentially, it represents the amount of money your lender or card company will charge in exchange for lending you money. APRs typically consist of:

  • Percentage rates of interest you have to pay (annually)
  • All other upfront charges due to your credit card company for example, any setup fees (annually)

Why is My APR So High?

Your APR is high because lending money to you might represent a higher risk to the lender. Every lender has their own lending criteria, and will check your credit file and credit score before lending to you. If you don’t meet their criteria, you may be viewed as risky resulting in your APR being higher. 

The truth is that credit card companies have limited options to get their money back if you fail to make repayments on your credit card bill. These options include reporting lack of payment to credit reference agencies resulting in lowering your credit score, or issuing a CCJ, but none of this guarantees that they will get repaid. The high APR helps lenders compensate for what they see as increased risk. On the conr For other types of loans such as a mortgage, failing to pay your bill will allow the bank to take back your house as a form of payment. 

Credit cards are known to be very risky by lenders because it’s possible for people to pay late or not pay at all. This explains why issuers charge high interest rates to make up for the risk of providing the service.

Related: Personal Loan Vs. Credit Card: What Are The Differences?

What is the Difference Between Representative APR and Real APR?

To understand how APR is calculated, it’s first important to understand the difference between ‘representative APR’ and ‘real APR’:

  • Representative APR: this is an example APR used for advertising purposes by credit card companies. In order to advertise a representative APR, the FCA requires that at least 51% of customers must be eligible for that rate. This means that only about half of the credit card applicants are actually eligible for  the  advertised APR. Your APR could be much higher than the advertised representative APR. Be sure to read the final offer or contract thoroughly before signing anything.
  • Real APR: is the actual amount that you will pay rather than the ‘average’ rate used for advertising purposes. It’s important to note that this rate is often different and potentially higher than the representative APR. Be sure to read the final offer letter carefully when evaluating for a new credit card.

What Can I Do to Increase My Chances of Receiving the Representative APR?

Having a good credit score helps you to look more trustworthy to lenders which typically leads to getting the representative APR or better. A few other areas to look at for help increasing your chances of getting the representative APR include:

Related: What is the Average Credit Score in the UK?

What Factors Are Considered When Calculating Real APR?

Real APR is calculated on an individual basis by the lender. This means that you could have a different APR than your parents or your mate, even if you hold the same type of credit card. This is because the calculation is based on how ‘risky’ a borrower the card companies think you are. Credit card companies make this decision based on a range of information including your:

  • Credit history: a higher credit score usually means a lower APR
  • Current financial situation: usually including your current regular income, savings and outstanding debts
  • Past dealings with the lender: lenders will take a look to see if you’ve borrowed from them in the past and how it went

 Build Your Credit Score To Help Avoid High Interest Rates

Having a better credit score and credit history makes you look more stable to the lender which will result in more favourable interest rates on credit cards and other loan products.

Portify helps our members build healthy credit through monthly membership payments in partnership with all major Credit Reference Agencies in the UK. Download the app and get started in 3 minutes or less, today!

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Lauren Robson is the digital communications manager at Portify.
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