What is APR on a Credit Card? – The Essential Guide To Understanding

what is APR on a credit card

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.What is APR on a Credit Card

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.What is APR on a Credit Card

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.

What is APR on a Credit Card

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.

What is APR on a Credit Card

Credit Simplified

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



 

4 Comments

  1. I found so much useful information in this article and on this website.

    People today have no idea how to live without running up their credit card bills.

    I was in the same place many years ago, but today I am debt free

    Once people have an understanding of how they wreck their credit scores, they can start repairing the damage they caused.

    I think every high school graduate should read this. Thanks for the knowledge!

    Clay

    • Congratulations on becoming debt free! 

      I agree with you that many folks run up their credit card balances not realizing the damage they are doing.  There are strategies one can use that help ensure this does not happen.  

      One way is to keep your credit card utilization rate under 30%.  Abusing your limits can do quite a bit of damage to you credit rating.

      Here is another post I wrote that explains in more detail.

      How To Fix A Bad Credit Report

      Thanks for commenting on the post.

  2. Thank you for producing such a clear concise article on a financial term we are all aware of but often not sure exactly how it is calculated and what it means! 

    In my opinion, there is a severe lack of clear, easy to digest information on interest rate terms such as this. 

    I think schools should teach basic financial information and financial information as a matter of course! Instead, we all end up picking it up gradually as adults and often long after we need to! 

    Great post! I’m sure it will help lots of people 🙂

    • Hi Louise,

      Appreciate your comments.

      APR is definitely a difficult concept to understand.  Many consumer enter into credit card agreements without a clear understanding of the interest they will be required to pay.

      There are lots of sites out there that try to explain what APR really means, but its difficult to grasp.  What everyone needs is a basic understanding of math and an online calculator to help crystallize the idea.

      With a little practice anyone can understand what they are truly paying for interest on their credit card accounts.

      Thanks.

Leave a Reply

Your email address will not be published.


*