What is APR on a Credit Card?
Introductory APR. Variable APR. Balance transfer APR. Cash advance APR. We’ve all heard these terms before. APR stands for Annual Percentage Rate – the amount of interest you owe each year on your purchases. Simple, right? Not necessarily. If you’re one of the average Americans with over $16,000 of credit card debt, it’s not enough to have a surface knowledge of APR on credit cards. Understanding what is APR on a credit card and how it works will empower you to make wise financial decisions and get your family out of debt sooner.
Read on for our easy-to-understand guide to APR on credit cards.
The Difference Between Interest and APR
While APR is a type of inter
est rate, the two are not exactly the same.
APR is an annualized interest rate, but this doesn’t mean that a year goes by before you pay any interest. In fact, most credit cards compound their interest on a daily basis.
How you use your credit card also determines your APR. A card may offer an introductory 0% APR on balance transfers for a certain length of time. This means you don’t pay any interest on the amount you transfer.
You do, however, pay interest on any new purchases you make (and don’t immediately pay off). Depending on the type of card you have, this rate is usually between 13-23%.
Your interest rate will be even higher on cash advance purchases or penalties for late payments. On many cards, the penalty rate is nearly 30%!
Check out our post for more advice on the best low-interest credit cards.
When Do Credit Card Companies Charge Interest?
Most credit cards offer a “grace period” to pay off new purchases.
This is the length of time from when the statement closes to the actual payment due date. Typically this is around 21-25 days.
If you pay off the statement balance in full before the due date, you won’t be charged interest. If you only pay a portion, then the remaining balance will start accruing interest in the next statement period.
How is Interest Calculated?
Even though APR is an annual term, interest is calculated on a daily basis. This is known as the periodic interest rate.
To determine this figure, divide the APR by 365. For example, if your APR is 18%, that means your periodic interest rate would be 0.049% per day.
That may not sound like a lot, but if your balance is high, it can quickly add up!
Here’s a simple formula:
(Balance) x (daily periodic rate) x (days in the billing cycle) = interest charged
What Determines APR on Credit Cards?
The APR on most credit cards is variable, which means it can be adjusted based on two main factors.
- Creditworthiness. Most financial institutes will use your FICO score to determine your interest rate. The higher your credit score, the lower your APR.
- Prime Rate. A rate set by the US Federal Reserve. If they choose to raise or lower it, your credit card company will follow suit.
Now that you have a better understanding of what is APR on a credit card, you might be wondering what else you can do to improve your credit and save money.
If you haven’t done so recently, be sure to order a copy of your credit report so you know where you stand.
Also, be sure to check out our helpful article on managing your credit.
Did you find this article useful? Do you have any thoughts to share? Leave a comment below!
Get Control of Your Credit With Our Free Ebook
* indicates required