The gist: An annual percentage rate (APR) is a percentage that shows the interest you’ll be charged when you carry a balance on your credit card.

Your credit card’s APR is important because the dollar cost of your APR can add up fast if you’re not careful. Without an understanding of how APRs work, you might be hit with costs that you haven’t budgeted for. This could make it hard to keep up with payments which could result in a lower credit score. If you pay your balance on time and in full, you will not be charged the APR. 

Even if you don’t plan to carry a balance, it’s important to understand the different kinds of APRs, how they’re calculated, and what represents a competitive APR.

What does APR stand for?

APR stands for annual percentage rate. 

This is the same as the credit card’s interest rate. Be careful, even though the APR and interest rate are the same thing for a credit card, they are different for other products like a mortgage.

How does APR work?

An APR is essentially a charge the credit card company assesses for allowing you to carry a balance on your card. They also use APRs, in different amounts, for other transactions.

Knowing the dollar amount of the APR on your different credit cards is necessary for knowing which cards you should pay down first. In other words, the card with the highest APR cost, in dollar terms, should be paid first.

How is APR calculated?

Here is a sample of a monthly APR calculation:

Imagine that your current APR is 18.99% and that you owe $200 on your credit card throughout the month. This means that your monthly interest rate is 18.99% divided by 12, which is approximately 1.58%. Next, multiply $200 x 0.0158 for an amount of $3.16 each month.

Here is a sample of a daily APR calculation:

Again, Imagine that your current APR is 18.99% and that you owe $200 on your credit card for the month. To get your daily rate, divide 18.99% by 365, which equals 0.052. Next, multiple this by your $200 balance to get $0.10 as your daily periodic rate.

Types of APR

Purchase APR

The interest rate applied to the outstanding balance on purchases made with the credit card. It is the most common type of APR. This is the APR credit cards are referring to in most of their ads.

Balance Transfer APR

The rate applied to the outstanding balance that you transfer from one credit card to another. Balance transfer APRs are usually lower than purchase APRs because credit card companies want to encourage you to move your balance to their card.

Cash Advance APR

This is the interest rate applied to a short-term loan borrowed against your card’s line of credit. These APRs are almost always higher than the purchase APR and average between about 21% and 24%.

Introductory or Promotional APR

This is a temporary, lower interest rate usually offered for about 6 to 24 months. These rates can apply to purchases, balance transfers, or both. After the promotional period ends, the APR returns to the regular rate.

Penalty APR

If you violate the terms of your credit card agreement - missing a payment, exceeding your credit limit, or making late payments - you’ll likely need to pay a penalty APR which are often higher than the regular APR.

Variable APR

A variable APR is an interest rate that changes. The movements are based on an underlying index, such as the U.S. Prime Rate. 

APR vs APY?

APR tells you what you will owe if you carry a balance on your credit card.

APY (annual percentage yield) tells you how much interest you’ll earn on an investment or savings. APY is relevant to checking accounts, savings accounts, or certificate of deposit. 

What is a good APR?

When it comes to APR, lower is better.

As recently as the 4th quarter of 2022 the average credit card interest rate was 20.40% according to data from the Federal Reserve. This is a good baseline to use when assessing an APR. 

However, what counts as “good” can vary based on your credit score. A good APR for someone with poor credit will not be good in the eyes of someone with a strong credit history because those with a high credit score are used to lower APRs.

It is possible to get a 0% APR but that will only be part of a limited time offer. 

Sometimes it’s possible to get a low credit card APR from a local bank or credit union.

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Sources

• AOFund.org
• Chase.com