APR. That three-letter acronym looks so simple, but in the world of credit cards, it isn't.
The basic definition of an APR: It's an annual percentage rate of interest a credit card holder will be charged on all or a portion of the balance if the full amount isn't paid on or before the due date.
Beyond that, greater complexities lie.
Here's a summary of what you need to know:
One credit card, multiple APRsMost credit cards involve several different APRs. For instance, an "introductory" rate might apply as a special offer on a brand-new card while a "promotional" rate might apply to a balance that was transferred from one credit card to another, says Rich Bialek, a credit card industry expert and CEO of Bialek Group, a consultancy for financial services companies in Wheaton, Ill.
Different APRs also may apply to different types of transactions. For example, a cash advance typically would involve a higher APR than a retail purchase because the card company doesn't earn a merchant fee on a cash advance, and an advance is viewed as a riskier transaction, Bialek says.
Lower credit score, higher APRThe primary APR on most credit card transactions is based largely on the credit card holder's credit score, which includes the payment history on that particular card as well as other forms of credit. A lower credit score almost always means a higher APR.
APR includes interest, not feesThe APR is only one component of the cost of a credit card because cards typically entail various other fees as well. The card issuer doesn't know in advance which or how many fees the cardholder will incur, so it's impossible for that cost to be included in the APR. (Some APRs include the annual fee, if there is one.)
Consider the balance transfer fee, which results in a higher cost of credit than the APR stated on the balance transfer offer. A transfer APR of 2.9 percent might look attractive, but add on an upfront fee of, say, 3 percent, and that 2.9 percent isn't as low as it seems.
Moreover, most balance-transfer offers have an expiration date, after which a higher APR rate will be applied to any unpaid balance. New charges also may have a much higher APR, says Patricia Hasson, executive director of the nonprofit Consumer Credit Counseling Service of Delaware Valley in Philadelphia.
"If you do a balance transfer because it makes financial sense, I would highly encourage you to make sure you understand when the term expires and pay it off prior to the end of the term," she says. "And don't use that card actively for other purchases."