What is APR on a credit card?

Summary

• APR is the yearly cost of borrowing money when you carry a credit card balance.
• There are several types of APRs, for things like making purchases, transferring balances, or paying penalties.
• You can avoid paying a credit card APR by paying your account balance in full each month or taking advantage of promotions like 0% intro APR programs.

When you use a credit card, you make purchases now and can pay for them later. In exchange for that flexibility, credit card companies charge interest on your account balance unless you pay it off in full every month. This interest makes up the bulk of the card's annual percentage rate (APR), which is the annual interest rate, including any fees. It's important to understand APR credit card rates so you know how much you'll be charged in interest.

What is the meaning of APR?

APR is a credit card's annual percentage rate, which represents the yearly cost of borrowing money when you carry an account balance. If your card has an annual fee, that's also included in the APR.

How does APR on a credit card work?

Credit card APR works a bit differently depending on the type of card and the borrower. Generally speaking, the higher your APR, the more interest you're charged when you keep a balance on the card. But there are several factors that influence how APR works and how much you pay to use the card.

These factors include:

• Annual fee: If your credit card charges an annual fee, it's factored into the APR. If it doesn't, the APR is typically the same as its interest rate.
• Credit score: A higher credit score typically means you'll have a lower APR. A lower score means a higher APR.
• Compounding interest: A credit card's compound interest is the interest calculated on your unpaid balance, plus the interest that has already been added to the balance. Credit card companies usually calculate the interest you owe daily, determining the interest amount charged based on the daily average balance for the billing period.
• Fixed vs. variable rates: Many credit cards have a variable APR, which means your rate changes over time based on a benchmark index, like the federal prime rate. Fixed-rate cards will have the same APR as long as you use the account. Variable-rate cards will not, so it's important to keep up with rate changes to understand your costs for borrowing.

How do you calculate credit card APR?

To calculate credit card APR, you'll need to know both the APR and the daily periodic rate, which is how much interest you're charged per day on your balance. Let's look at an example:

Let's say that you owe $1,000 on a card with a 25% APR.

• Divide 25% by the number of days in a year, 365: 25 ÷ 365 = 0.0685% is the daily rate.
• Convert the daily rate into a decimal by multiplying it by the average daily balance: 0.000685 x 1,000 = 0.685. That's 68.5 cents per day.
• Multiply the day rate by the number of days in the billing cycle (usually 30): 0.685 x 30 = $20.55

In this example, you'd pay $20.55 in interest on a $1,000 balance with a 25% APR.

Different APRs on a credit card

Depending on how you use your credit card, you may have different APRs:

Purchase APR

The purchase APR is the most common APR you'll see. This is the regular APR you pay on purchases and you carry a balance.

Promotional APR

Credit card companies often offer low or 0% APRs to incentivize people to open a new account. Promotional APRs usually only apply to purchases made over the first few months or year that you use the card before reverting to the standard purchase APR.

Balance transfer APR

Transferring a balance from one credit card to another can be a way to save money due to balance transfer APRs. These special offers give you access to a lower APR for balance transfers for a limited time, allowing you to pay down the card with lower interest charges.

Cash advance APR

Some credit cards allow you to get cash against your credit limit. When you get a cash advance with your card, you'll usually pay a separate, higher APR without a grace period. That means you'll have to pay interest no matter what; you can't avoid paying interest by paying your account balance off by the due date.

Penalty APR

Missing or late payments will result in fees, but it can also lead to a penalty APR. When you've been late or missed multiple payments, the credit card issuer might require you to pay a higher penalty APR until you get back in good standing.

Can you avoid paying a credit card APR?

There are two ways to avoid paying a credit card APR:

• Pay your balance in full: Because credit cards have a grace period before interest is charged, if you pay your full account balance by the payment due date, you won't be charged interest.
• Introductory periods: If you get approved for a low intro APR card, you won't pay interest during the intro promotional period.

APR makes a big difference

APR can vary significantly between credit cards, which means some cards are much more expensive to use than others. If your credit score is in good shape, you should be able to qualify for a lower APR. By keeping up good credit and debt management practices, you may save a significant amount on credit card interest charges.