What is APR on a credit card?

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Whenever you pay your monthly credit card bill, whether it’s through an online portal or a plain old paper statement that you mail in with a check enclosed, you’ll probably see references to APR. So what is credit card APR?

APR stands for annual percentage rate, which simply means interest on some type of credit account. With a credit card, APR generally refers to the interest applied to your account during a given billing cycle. It most often comes into play if you carry a balance, but it can also apply to interest on charges or transactions including:

  • Late payments (penalty APR)
  • Cash advances
  • Balance transfers

Credit card holders should know how APR works, when it might apply to them and — perhaps most important — how good financial habits can help them avoid it.

How APR works

With credit cards, APR is calculated using a fairly complicated formula:

  1. It starts with dividing your credit card’s purchase APR, also called go-to APR, by 365 (the number of days in a year). For example, if your APR is 18 percent, your daily rate is .00049 percent.
  2. Then your balances at the end of each day in the billing cycle are added up and divided by the number of days in the billing cycle to get the average daily balance.
  3. Your daily rate is multiplied by your average daily balance, and that number is multiplied by the number of days in the billing cycle. With most issuers, the interest compounds daily.

Daily rate X average daily balance X days in billing cycle = credit card interest

As complex as the math is, there’s good news. This interest doesn’t get charged to your account if you keep your balance paid in full and on time every month. You also have the benefit of a grace period that starts at the end of the billing cycle and usually lasts 21 days, a period of time when you can pay off your new balance without facing interest charges.

How much APR could cost you

However, if you do carry a balance on your credit card, you will owe interest. How much depends on your card’s APR, the size of your balance, the size of your monthly payment and other factors. You can use Bankrate’s Credit Card Payoff Calculator to get an idea of how much APR could cost if you carry a balance and make only partial monthly payments.

Experian reports that the average American’s credit card balance in 2020 was $5,315. Bankrate estimates the average credit card interest rate at around 16 percent. Using a range of APRs and a minimum monthly payment of 3 percent of the balance, here are some scenarios from the Credit Card Payoff Calculator:

Minimum monthly payment (3%) Repayment timeline Total interest charges
$5,315 at 12% APR $159 41 months $1,186
$5,315 at 16% APR $159 45 months $1,768
$5,315 at 24% APR $159 56 months $3,551

What are the different kinds of APR?

The APR that most people are familiar with is the purchase APR. However, there are several types of APR that could apply to your credit card. Here are the main variations that you should be familiar with.

Purchase APR

Purchase APR is the interest rate applied to all purchases made with your card. Any time you use your card to buy something, whether online or in-store, this amount will be applied.

Introductory APR

Credit cards with introductory APR offers provide a promotional interest rate available for a limited period of time that is lower than the card’s regular APR, sometimes as low as 0%. It can apply to purchases or balance transfers or both. Once the introductory period expires, the regular APR will apply to your balance.

Cash advance APR

Cash advance APR the interest rate applied when you borrow cash on your credit card. This rate is typically higher than purchase APR, involves a cash advance fee and doesn’t have a grace period. It’s also the rate usually applied to convenience checks.

Penalty APR

Penalty APR applies to missed or returned payments and could go as high as 29.99 percent. You might have to make several consecutive on-time payments before your credit card issuer removes the penalty APR. A payment more than 60 days past due could result in penalty APR applying to your current balance, as well.

Fixed APR vs. variable APR

Another important aspect of credit card APR is that the rates can be fixed or variable. With credit cards, variable rates are far more common than fixed rates.

A fixed APR rarely changes, except in the case of a late payment or the expiration of an introductory offer. More often than not, your credit card will have a variable APR that covers a certain range, such as 15.49 percent to 25.49 percent. A variable APR changes according to the prime rate, a benchmark that lenders use to determine interest rates on credit cards as well as other credit accounts such as loans and mortgages.

The benefit of a fixed rate is that your rate is locked in for a period of time. It makes planning for your payments easier because you know the rate will generally stay consistent. However, card issuers can change a fixed rate at their discretion, though they’re required to provide notice.

A variable APR may increase or decrease depending on fluctuations in the prime rate. While a variable rate may not offer the predictability of a fixed rate, it offers the possibility of paying less.

What is a good credit card APR?

A good benchmark to use when judging APRs is the average rate, which currently hovers around 16 percent. How close to (or far away from) your credit card APR falls to the average depends on factors including your credit score and what type of credit card you have.

If you have a lower credit score, your APR is likely to be higher. With a higher credit score, your APR is likely to be lower. By improving your credit, you increase your chances of scoring a lower interest rate.

The bottom line

Your APR is a key part of understanding your credit card bill. If you don’t plan to carry a balance on your credit card, you won’t have to worry about it too much. However, if you are among the people who do carry a credit card balance, understanding your APR will make budgeting for your monthly credit card payments much easier.