Canada
US
You are now leaving our website and entering a third-party website over which we have no control.
What is APR on a Credit Card?
There’s a lot of financial data to comb through when you are applying for a credit card. One important piece of the puzzle is understanding the APR (annual percentage rate) and how it works.
With credit cards, the APR and the interest rate are the same. APRs on similar credit cards can vary significantly from one credit card issuer to another. Even two consumers applying for the same card from the same bank may receive different interest rates, or APRs. This discrepancy is often due to differences in creditworthiness, highlighting the importance of knowing the exact interest rate you'll be charged.
The APR can be a handy way to compare one credit card offering from another. In this article, we'll explain what the APR on a credit card means.
How does APR work?
Although the APR and the interest rate are the same with credit cards, the two differ with other types of loans. In mortgages and personal loans, the APR tends to be higher than the interest rate. That's because the APR adds together fees, other charges, and the interest the borrower pays, to come up with an annual rate that reflects the full cost of borrowing.
You can avoid paying interest on your credit card account by paying off the balance before the due date or within the account's grace period. Otherwise, interest will be charged against the balance and added to your bill.
Types of APR on a Credit Card
There are different types of APR for credit accounts and credit cards because each type serves a specific purpose and carries varying levels of risk for the credit card issuer. It’s important to understand how each APR functions and which option is aligned to your financial needs.
Let’s dig into some of the most common APRs you’ll come across.
Fixed APR
This type of APR remains constant throughout the cardholder's agreement unless specified otherwise. The rate is not tied to any index, and the card issuer must notify you in advance if they decide to change the rate. Fixed APRs provide stability for consumers, as they know exactly what interest rate they will be charged over time.
Variable APR
This APR can fluctuate based on changes in the market or economic conditions, allowing issuers to adjust rates according to economic changes. The interest rate is tied to the U.S. prime rate, or some other index. Any changes to a variable APR will be shown on your monthly credit card statements.
Purchase APR
This reflects the interest rate applied to purchases made using the credit card if you carry a balance from month to month. You might think of it as the main APR on the account. When you carry a balance, the credit card issuer divides the purchase APR by the number of days in the year and applies that daily rate each day to the balances on your purchases. Later in this article, we’ll walk you through the formula.
Cash advance APR
You can use a credit card to obtain cash. Your credit card issuer may allow this at an ATM, bank branch, or through a convenience check, which is a blank check it provides. However, there may be a fee applied to the transaction and the cash advance APR usually is much higher than the purchase APR. Also, interest begins to build on a cash advance immediately. There is no grace period.
Balance transfer APR
This rate is applied when transferring a credit card balance from one card to another. Balance transfer APRs tend to be low to incentivize consumers to transfer balances from other cards. Many cards will offer an introductory 0% APR for a set period after opening the account.
Penalty APR
As an incentive to keep card holders on track, many credit card issuers have a penalty APR—a very high interest rate that’s triggered by various infractions. Card issuers have different rules, but triggering events might include not making the minimum payment, making a late payment, exceeding the limit on your card or having a payment returned due to insufficient funds. The penalty APR is then applied to new purchases and other activities, as well as to any fees imposed because of the triggering event.
Intro or Promo APR
Intro and Promo APRs are temporary offers designed to attract new customers or promote specific card features. These offers are usually considerably lower than the card’s purchase APR and will expire after a pre-determined time.
How do you calculate APR?
The APR is an annual percentage rate, but your credit card issuer charges interest on a daily basis, because the balance on your account can change from day to day. To calculate your monthly interest charges, based on your APR, you must first look at your statement to find out the number of days in the account's billing cycle. (Card issuers have slightly different billing cycles, usually 28 to 31 days.)
To determine your monthly interest charges on your credit card balance, follow this method:
- Determine the daily rate. Divide your APR by 365. If your card has a 20% APR, your daily rate would be 0.054%. You must convert that percentage to decimal form—0.00054—for the calculation
- Determine the average daily balance. Add up the credit card balance from each day in the billing cycle and divide this sum by the number of days in the billing cycle
- Apply the formula. Credit card APR daily rate × Average daily balance × Number of days per billing cycle. So, for example, it could be: 0.00054 x $1,000 x 29 = $15.66 in interest charges
APR vs. APY
These terms are similar, but they are used on different types of accounts. APR applies to loans and reflects the interest charged to consumers on accounts like personal loans or credit cards. The APY, or Annual Percentage Yield, is used on savings accounts and investment accounts, for example, and it reflects the annual rate of return on those accounts, including the compound interest.
Can you lower APR on a Credit Card?
Improving your credit score can lead to a lower APR, as lenders often offer better rates to those with excellent credit histories. Additionally, balance transfers can temporarily reduce your APR, sometimes to 0%, for a specified period. Another option is to simply ask the credit card issuer to reduce the rate. Consumers who have a long history and an excellent record with a credit card company have a better chance of having this request approved.