When you review your monthly credit card statement, you’ll see references to APR. APR stands for annual percentage rate and refers to interest on a 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 when you carry a balance, but other transactions—like cash advances and late payments—are also subject to APRs, which might be higher than your regular rate.
Everyone with a credit card should know how APR works, when it might be applied, and, most important, how good financial habits can help you avoid it.
How APR works
This is how APR is calculated for credit cards:
[daily rate] x [average daily balance] x [days in billing cycle] = credit card interest
Daily rate: You can find this by dividing your credit card’s purchase annual percentage rate by 365 (the number of days in a year). For example, if your APR is 18 percent, your daily rate is .00049 percent.
Average daily balance: Add up your balances at the end of each day in the billing cycle and divide the sum by the number of days in the billing cycle. This is your average daily balance.
Days in billing cycle: Your daily rate is then 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.
How much APR could cost you
The good news is that this interest doesn’t get charged to your account if you pay your balance in full and on time every month. Doing this will also give you the benefit of a grace period. This is usually a 21-day period that starts at the end of the billing cycle during which you can pay off your new balance without facing interest charges.
If you do carry a balance on your credit card, however, you will owe interest. You’ll also lose your grace period for the next several months, even if you carry a balance only for one month. How much interest you’ll be charged depends on your card’s APR, the size of your balance and the size of your monthly payment.
Experian reports that the average American’s credit card balance in 2020 was $5,315. Bankrate estimates the current average credit card interest rate at above 16 percent. Interest charges can quickly add up and only get larger the longer you carry a balance.
Here are some scenarios using a range of APRs, a minimum monthly payment of 3 percent of the balance and assuming no additional charges are made on the card:
|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|
If you’re faced with carrying a balance, use Bankrate’s Credit Card Payoff Calculator to get an idea of how much you’ll end up paying in interest if you make only the minimum payment. You can also see how much money you can save by adding more to your payment each month.
What are the different kinds of APR?
The APR that most people are familiar with is the purchase APR. There are several types of APR, however, that you should be aware of.
- Purchase APR: This is the interest rate applied to all purchases made with your card online, in person or over the phone.
- Introductory APR: A promotional interest rate for a limited period of time that is lower than the card’s regular APR, sometimes as low as 0 percent. 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: This rate for borrowing cash from your credit card is typically higher than your purchase APR and doesn’t have a grace period. It’s also often applied to convenience checks.
- Penalty APR: This 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 the penalty APR applying to your current balance, as well.
Fixed APR vs. variable APR
A fixed APR rarely changes, except in the case of a late payment or the expiration of an introductory offer. 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 still change a fixed rate at their discretion, they’re simply required to provide notice. Fixed rate credit cards are becoming increasingly harder to find.
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. While a variable rate may not offer the predictability of a fixed rate, it offers the possibility of paying less.
Learn more: How tolower credit card interest rates
What is a good credit card APR?
A good metric to consider when looking at APRs is the average rate, which is currently sitting above 16 percent. How your credit card APR compares 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 an important consideration when it comes to a credit card. If you don’t plan to carry a balance on your credit card, you won’t have to worry about it too much.
If you find yourself needing to carry a credit card balance, however, understanding your APR will make budgeting for your monthly credit card payments much easier.