What is APR? What do you want to know

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APR stands for Annual Percentage Rate, and it’s an essential concept for anyone borrowing money to understand. It is the total interest rate paid annually over the life of a loan. APR plays a vital role in many consumer financial products, such as credit cards, auto loans, and mortgages. Since credit card APRs are generally much higher than APRs for other types of loans, knowing the APR of a credit card is crucial.

What is the APR on a credit card?

A credit card’s APR determines the interest paid on borrowed money for a period longer than the credit card’s billing cycle. Most credit cards do not charge interest on purchases if the balance is paid in full by the due date. The APR of a credit card is based on many factors, including the borrower’s credit score and the issuing bank. A cardholder can find their credit card APR on their account statements.

How does APR work?

The annual percentage rate represents how much it costs to borrow money. The APR is based on the interest rate and any fees charged by the lender. It is expressed as a percentage.

A loan originator – usually a bank – is responsible for setting an APR. Usually, the APR is based on the US prime rate, which is the best rate lenders offer their most trusted customers. Banks then charge a profit margin on top of the prime rate. Generally, the higher a borrower’s credit score, the lower their APR.

A credit card APR can be 15% or less for cardholders with excellent credit ratings or up to 30% for those with poor credit ratings.

What is the difference between APR and interest rate?

APRs and interest rates are related but have slightly different calculations. The interest rate refers to the amount of money the lender charges for the loan. APR takes into account the total cost of the loan.

For example, for a $1,000 cash advance on a credit card, the card issuer may charge an interest rate of 20%. If the card issuer also charges a 2% cash advance fee, the APR – the actual cost of borrowing money – is 22%.

If there are no other fees associated with borrowing money, there is no difference between the interest rate and the APR. In most cases, the APR is higher than the interest rate listed for an account.

What is the difference between the APR and the effective annual interest rate?

Banks use a daily or monthly periodic rate for credit card APR. Dividing the APR by 365 provides the daily periodic rate. Dividing the APR by 12 gives the monthly periodic rate. The lender adds the periodic charge to the credit card balance. This rate of accumulation is known as the effective annual interest rate. This rate is the actual interest rate charged on a financial product following the capitalization of credit over a period of time.

Good to know

A borrower will pay more if interest is compounded daily rather than monthly. This difference is important for cardholders who do not pay off their balance in full each month. Partial payment on a credit card balance at the beginning of the billing cycle rather than at the end can save on interest if compounding daily.

What are the different types of APR credit cards?

Other types of APR associated with credit cards are also essential for cardholders to know.

Introductory APR

An introductory or promotional APR is usually extended to a new cardholder for a specified period. This APR is often lower than the regular APR, which is why many credit issuers often offer it, enticing people to apply for a new card. An introductory APR can sometimes be as low as 0%. The card reverts to its regular APR once the introductory period ends or if the cardholder fails to make payments on time.

APR balance transfer

A Balance Transfer APR is similar to an Introductory APR and is sometimes used in conjunction with it. The Balance Transfer APR is a low or 0% APR that applies to balances transferred to the card from another credit card. The rate is fixed for a specified period or until a cardholder fails to make payments on time.

Fixed APR

Introductory and balance transfer APRs are usually set during the introductory or balance transfer period. The rate is locked and will not change until the end of the period or if a cardholder does not make payments on time. Except during the introductory and balance transfer periods, most credit cards do not have a fixed APR. The rate may stay the same for an extended period of time, but that just means the card issuer hasn’t changed it.

Variable APR

Most credit cards have a variable APR. A variable APR changes based on the prime rate that lenders charge their best customers. A cardholder’s APR may increase if the prime rate increases.

Purchase APR

The purchase APR is the rate used for all purchases not made during an introductory period. The purchase APR is generally variable.

APR cash advances

Cardholders who borrow money from a credit card must pay an APR cash advance. It is usually higher than the purchase APR and will apply to the cash advance balance until the balance is paid off.

APR Penalty

If a cardholder is more than 60 days late on a payment, the card issuer may apply an APR penalty. APR penalty can be up to 29.99% and can apply to all purchases on the card, including additional purchases. A card issuer will generally not reduce an APR penalty until the cardholder submits payment history on time.

What is a good APR?

A good APR is one that is lower than the average interest rate. These APRs are usually reserved for customers with the highest credit scores.

The lower end of the APR range is a good rate for someone with excellent credit. For example, on a credit card with a variable APR between 12.99% and 24.99%, an APR of 22% might be a good rate for someone with bad credit, but would not be a good rate for someone with good credit. It may not be as good as the lowest rate, but it is lower than the 29.99% of some cardholders with bad credit scores. That’s why it’s important to compare credit card APRs before applying for a new card.

Take away

APR plays a vital role in how much it costs to borrow money. Credit cards, in particular, can be expensive if the APR is high and the balance is not paid off in full each month, so knowing what the APR is on a credit card is essential. Cardholders who get a good APR should always make timely payments to keep their APR as low as possible. Since credit cards typically have a variable interest rate, a card issuer may choose to increase an APR if a cardholder is more than 60 days past due on a payment.


Here are answers to some common questions about APR credit cards.
  • What is 24.99% APR on a credit card?
    • An APR of 24.99% means that if a cardholder carried a balance of $100 for a year, they would accrue nearly $25 in interest payable on that $100. Sure, no one carries the same balance for a year, but that shows how expensive a high APR card can be if it’s not paid in full every month.
  • Is 22% APR high for a credit card?
    • Some credit cards have an APR as low as 12.24% for those with the best credit ratings. So 22% is a high APR for someone with great credit. That’s not high for someone with fair to low credit.
  • Is 24.99% APR good for a credit card?
    • An APR of 24.99% is high for someone with good to excellent credit, but it’s consistent with an APR for fair to poor credit. It’s not the worst APR out there, but it will be expensive if the cardholder has a balance.
  • Do I have to pay APR if I pay on time?
    • If you pay off your credit card balance in full on time every billing cycle, you won’t pay the APR. Typically, APR is only accrued on outstanding balances. If you don’t pay off the entire balance and instead carry a balance month-to-month, you’ll pay the APR on the remaining amount.

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About the Author

Andrea Norris has worked in the web publishing industry for 15 years, both as a content contributor and editor specializing in topics related to personal finance, frugal living, home and automotive . She writes short and long content and is well trained in SEO keyword research and writing.

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