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 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 how good financial habits can help you avoid it.

How APR works

Credit card APR generally refers to the interest applied to your account during a given billing cycle. 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.

What are the different types of APR?

The APR 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 APR. 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: The 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. Payments more than 60 days past due could result in the penalty APR applying to your current balance, as well.

Credit card APR vs. credit card interest

The Truth in Lending Act requires that lenders disclose their interest rates as APRs. The APR on your credit card quantifies how much it actually costs to borrow money. When it comes to other financial products, the interest rate and APR may be different.

Let’s say you’re refinancing or taking out a mortgage, for example. The interest rate is different from your loan’s APR because the interest rate refers to the annual cost to borrow money, but the APR takes into account all the fees the borrower faces in addition to the annual cost to borrow money. But that is not the case with credit cards; the interest rate and APR are the same.

Your credit card may come with an annual fee or additional fees when it comes to initiating a balance transfer, cash advance or late payments, but those fees aren’t included in the APR.

Fixed APR vs. variable APR

A fixed APR rarely changes, except in the case of a late payment or an introductory offer expiration. 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 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 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.

How much APR interest could cost you

The good news is 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.

The average American had a credit card balance of $5,221 in 2021 and Bankrate estimates the average credit card interest rate now hovers above 18 percent. It’s important to remember interest on credit cards is compounding and will 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.

How to pay less in credit card interest

Making a purchase with a credit card has many benefits, especially if you are trying to build your credit or earn rewards — but interest charges could cost you a lot of money over the long term.

With that in mind, your best bet is to avoid interest charges or take steps to minimize their impact.

The strategies below can help you save money on credit card interest now and later in life:

  • Pay your credit card bill in full each month. Most credit cards offer a grace period that begins on the last day of your billing cycle and ends on your payment due date. If you pay off your statement balance before your grace period ends, you won’t be charged interest on those purchases. Most credit cards allow you to set up auto-pay so that you never miss a payment.
  • Pay your bill early. You don’t have to wait until your billing statement closes to make a payment. In fact, you can reduce interest charges on revolving balances by paying your credit card bill early and reducing your average daily balance throughout the month.
  • Sign up for a balance transfer card. Already have costly debt? Consider transferring your balance to a credit card that offers a 0 percent intro APR period. The best balance transfer credit cards offer up to 21 months of no interest before the regular APR kicks in.
  • Pick a credit card with a low APR. Be mindful of a card’s different interest rates before you apply. Look for cards that offer a lower than average interest rate, or even a 0 percent APR credit card that lets you avoid interest on purchases for a limited time.

The bottom line

If you have a credit card, it’s important to understand what APR is and when it might affect you. 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.