- It’s important to know your credit card’s APR in order to avoid paying excess interest.
- Improving your credit score can allow you to qualify for a lower APR.
- There are four different types of APR on credit cards: introductory, balance transfer, penalty, and cash advance.
If you have a credit card, you likely saw the term APR when you initially signed up. You probably also see the acronym on your monthly credit card statement. “But what exactly is an APR?” you might be wondering. “I see the term so much, I feel like I should know what it means by now.”
In short, an APR, or annualized percentage rate, is the annualized interest rate you’re charged for borrowing money through a credit card. It’s important to know what your APR is, because if your APR is high, you could pay a lot of interest each month without even realizing it. And with the average balance on just one credit card at a little over $6,000, millions of people are likely doing just that.
Below, we’ve answered some of the most common questions about credit card APRs so you can be as educated as possible the next time you open a new credit card.
1. What Is APR on a Credit Card?
APR, or annual percentage rate, is the annualized cost of the interest a credit card issuer charges in order to borrow money through them. The interest rate is “annualized” because in many cases interest is calculated on the daily credit card balance and charged monthly, so an APR standardizes the cost of borrowing for one year. The APR also lets you compare apples to apples, especially when different credit cards have different interest rates, rules, or billing periods.
2. Why Does a Credit Card’s APR Matter?
It’s important to know a credit card’s APR before you sign up for a new card because the APR determines how much money you could pay in interest each month.
Most credit cards have a grace period, which is a time period between the end of your billing cycle and the payment due date. If you pay your balance within this grace period and in full each month, you won’t be charged any interest.
But if you pay less than the full balance, you will be charged interest based on the balance carried during the previous period (the terms differ depending on the credit card company). If you’re late with your payments, most companies charge penalty credit card APRs that can be exceedingly high. This is why it’s crucial to know a card’s APR and the many types that you can be charged before applying for one. More on the different APR types below.
3. What’s the Difference Between an APR and an Interest Rate?
When it comes to credit cards, they’re the same thing — an APR is essentially your credit card’s interest rate. We’ll go into more detail on this below.
4. How Is APR Charged?
Credit card APRs are more complicated than they seem. You aren’t simply charged your APR, say 17.5%, once a month or once a year. Your APR will actually be charged daily in the form of a daily rate, which is a number calculated by the credit card company. Interest is only charged if you carry a balance after the payment cycle and added on top of your balance—and that interest in turn also earns interest in the next billing cycles.
So now you can visualize how credit card debt can quickly snowball if you’re not careful with APR and credit card balances.
5. How Can I Calculate My Credit Card Interest Rate Charges?
Figuring out your credit card’s daily rate can be a great way to determine exactly how much you’re paying in credit card interest each month. Here’s how to do it.
First, you’ll want to locate your current APR. This can usually be found in the section of your monthly credit card statement that says, “Interest Charge Calculation.” You’ll see a number, say “17.5%(v).” The (v) means you have a variable interest rate. More on variable vs. fixed rates below.
To find your daily rate, you’ll want to divide your APR by the number of days in a year. So in the above example, 17.5% divided by 365 equals a daily rate of .0479%.
Next, you’ll want to figure out your average daily balance (one of the methods credit card companies use in this calculation). This can be done by looking at your most recent billing statement, adding up each day’s balance, and diving that number by the total days in the month. To figure out how much you paid in interest the previous month, you’ll multiply your daily rate (0.0479%) by your average daily balance, then multiply that result by the number of days in the month.
Here’s an example of this in action. Let’s say your average daily balance for May was $700. You’d multiply 700 by 0.0479%, which gives you 0.3353. Then, you’d multiply that number by 31, the number of days in May, and get 10.39. This means you paid $10.39 in interest in May.
6. What Is the Average APR on a Credit Card?
The average APR on credit cards in the U.S. is between 17.01% and 23.96%, according to recent figures from U.S. News. The APR on credit cards varies based on the type of credit card, with store credit cards often having higher APRs and cash back credit cards often having lower APRs.
Your credit card’s APR will also depend on your financial standing. Those with a better credit score will qualify for a lower APR than those with a fair or poor credit score.
7. What Are the Different APR Types on Credit Cards?
There are different types of APRs on credit cards. The purchase APR is the rate you’re charged on your monthly outstanding balance. When you think about a credit card’s APR, you’re likely thinking about the purchase APR.
Credit cards have other types of APR in addition to the purchase APR.
Some credit card issuers will offer an introductory APR perk when you sign up for their card. This introductory APR is lower than the card’s actual APR (as low as 0%), and it typically lasts anywhere from six months to a year and a half.
If you open up a card with a 0% introductory APR, you won’t have to pay any interest on your outstanding balance. But the interest charges are accruing every day since the date you used your credit card, and that could mean that you would owe a lot more than you expect. Just make sure you can pay off the balance before the introductory rate time frame ends, or else think twice before succumbing to these offers.
Balance Transfer APR
A balance transfer APR is usually a special introductory rate offered to consumers who transfer an existing credit card balance to a new card. This is a popular marketing tactic that credit card companies use to attract customers from other companies. Often, balance transfer credit card APRs will be as low as 0% during the introductory rate time frame, allowing you to pay off credit card debt interest-free so this can work in your favor if you want to get out of credit card debt.
Just make sure you pay off your transferred balance within the introductory rate time frame, as the interest rate could spike once it’s over, and you could be stuck paying retroactive interest. Also note the purchase APR for this credit card as well, since this could be higher than your previous credit card and negate any benefits if you continue to charge purchases without paying off the balance.
A credit card can charge a penalty APR if a consumer is significantly late on their payments, typically by 60 days or more. A penalty APR will likely be much higher than your credit card’s purchase APR and a costly consequence to missing payments, not to mention the detriment to your credit score.
Cash Advance APR
Another type of credit card APR is a cash advance APR, which can be charged when you use your credit card to withdraw money from an ATM. Cash advance APRs are typically higher than purchase APRs and a poor source of funds unless you are in a dire emergency.
All of these different APRs are important to note when you’re shopping for a credit card.
8. What Is the Difference Between a Fixed APR and a Variable APR?
Most credit cards have variable APRs, though it’s possible to find ones with fixed APRs. A variable interest rate means exactly what its name suggests — the card’s interest rate will vary over time. “But how?” you might be wondering. A variable interest rate will change based on the country’s “prime rate,” which is influenced by the U.S. Federal Reserve.
If you have a credit card with a fixed interest rate (which is pretty uncommon), the issuer or bank will most likely contact you if they plan to raise the card’s interest rate.
9. How Can I Qualify for a Good APR?
The APR you qualify for largely depends on your credit score. Therefore, securing a good APR on a credit card is all about having a good credit score.
If you’re interested in opening a new credit card, focus on improving your credit score so you can qualify for a better rate. Improving your credit score can be achieved by paying your bills on time and in full each month, checking your credit report for errors, not closing old credit cards, and watching your credit utilization ratio by trying not to use too much of your available credit each month.
If you’ve achieved a better credit score and have made consistent payments on your credit card, try calling the company and see if they would lower your interest rate. The competition for customers is fierce in the credit card industry, and you might just win in a friendly negotiation with them for better terms.
Last Tip: Research APR Before Committing
Knowing a credit card’s APR before you open a card can mean the difference between paying $10 in interest and paying $100 in interest each month. Shop around and check out various card issuers’ APRs to find the lowest rate. Also, take a look at a credit card’s potential fees, such as annual fees, foreign transaction fees, cash advance fees, and balance transfer fees.
If your credit score isn’t in good enough shape yet to qualify for a decent APR, consider taking a few months to repair your credit using some of the steps we covered above.
It’s also important to remember to check your credit card statements each month to verify how much you’re paying in interest, as you could be paying way more than you think.