What is APR and how does it work?

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If advertising is any indicator, “APR” is hardly a term worth explaining. From used car dealership fliers to Michael Bay-grade commercials from the major banks, APR gets tossed around like a football, gliding well over our heads and landing softly in the eager hands of the financial intelligentsia.

Dramatic, perhaps. But somewhere in there rests a point: It’s okay if you’re a little fuzzy on APR. We’ve got the skinny.

What is APR in simple terms?

The easiest way to put it? APR stands for “Annual Percentage Rate.” When we’re talking about credit card APR, we’re simply talking about your interest rate per annum. See? Easy, right?

There’s a little more to it than that, and APR can take on different meanings when we’re jumping between industries and credit card types, but we’ll save that for later. For now: APR = your interest rate costs on the year.

APR in slightly less simple terms.

When you apply for a credit card, one of the first things you should notice is its APR — be it high (as high as 24%) or low (as low as 0%). Issuers calculate a card’s APR by indexing to an industry standard (say, the U.S. Prime Rate), then padding it with a small buffer of their choosing that could depend on the type of card, associated fees or type of borrower you’ve proven to be (as judged by your credit score).

Still with us? When you carry a balance, your APR essentially determines the interest you’ll owe at year’s end. (Editor’s note: If you don’t ever carry a balance, you can pretty much stop reading here. Pay your card in full every month, avoid paying interest. That simple.)

What’s with all the types of APR?

Squint through the fine print of any credit card, and you’ll see a few different APRs for a few different circumstances.

  • Purchase APR: The rate of interest you’ll incur for virtually any purchase if you don’t clear your balance.
  • Penalty APR: The rate of interest you’ll incur on all future balances after missing your minimum payment over the course of a designated period (typically 60-ish days).
  • Balance Transfer APR: If you transfer the outstanding balance of one credit card to another, this is called a balance transfer. The balance transfer rate is the interest you’ll incur on that balance.
  • Cash Advance APR: The rate of interest you’ll incur for using your credit card to withdraw cash funds.

What’s it to me?

Long and short: The credit card issuers need to make your business worth their while, and APR is the way they do it. That said, paying APR is not inevitable, not only are there a host of 0% interest credit cards to chose from but so long as you clear your balance you won’t incur APR expenses at all. However, it’s critical to pay close attention to interest rates before you sign on to a credit card.

Remember, APR is a simple earmark to help you compare credit cards on the fly. Stealthy late fees and the force of compounding interest (interest charged on top of interest) mean you could end up spending quite a bit more on your purchases than their original price point, provided you net out with a balance at term’s end.

Our advice? Keep it simple. Be a good borrower. Pay off your balance every month, and look out for low (or no-) APR cards that keep you protected in the off chance you don’t.

Don’t fall prey to interest rate payments. Check out Bankrate’s complete catalog on credit card APR advice and learn how to finance your next purchase with what our experts have rate to be the best 0% APR credit cards.