What is APR on a credit card?

You're reading the fine print on a credit card offer and notice a percentage, listed as the card's APR. You're not even sure what an APR is. Is it something you need to care about? If you plan on carrying a balance, yes, as the APR affects how much you'll truly end up paying.

What is APR?

The annual percentage rate (APR) is the cost of borrowing on a credit card. It refers to the yearly interest rate you'll pay if you carry a balance, plus any fees associated with the card. APR often varies by card. For example, you may have one card with an APR of 9.99% and another with an APR of 14.99%.

How does APR work?

When you have a balance on a credit card, you typically need to pay interest on it. Credit card companies take your credit score into account when setting your APR, with a higher credit score generally translating to a lower interest rate. A lower APR is usually better, as it costs you less to borrow using a particular credit card.

While almost all credit cards have an APR, you don't always have to pay it. Most cards have a grace period, during which you can pay the balance due in full without owing any interest.

If you use a card to get a cash advance, you'll also have to pay interest and fees, and those are usually higher than the APR on your standard balance. 

Fixed-rate vs. variable APR

Credit cards often have a variable APR, meaning your rate can go up or down over time. Variable APRs are tied to an underlying index, such as the federal prime rate, which is the lowest interest rate at which banks will lend money. If the prime rate increases, your card's APR also increases, and vice versa if the prime rate goes down.

In contrast, a fixed-rate APR will remain the same from the time you open the credit card account.

What is a good APR for a credit card?

A good APR on a credit card depends on several factors. An ideal APR may be 0%, but that can be nearly impossible to find unless you open a card with a special promotional APR. In that case, the APR won't stay at 0% forever.

To determine if an APR is good or not, look at the average rates for people with the same credit score as you. For someone with a good or very good credit score, an APR of 20% could be good, while a 12% APR may be good for someone with an excellent score. If your score is lower, an APR of 25% could be considered good. No matter your score, the lower the APR, the better.

How to calculate APR?

When you know the APR on your credit card, you can use it to calculate how much you may have to pay on a balance. To do that, you'll need to figure out the daily periodic rate, or how much credit card interest you're charged per day on your balance.

Say you owe $1,000 on a card with a 20% APR. Here's how to figure out how much you'll actually pay:

1. Divide 20% by 365, the number of days in a year: 0.2/365. You'll get 0.0548% as a daily rate.
2. Multiply the daily rate by the balance you owe: 0.0548% x 1,000. You'll get 0.548, or about 55 cents per day.

To see how much you'll pay per month, multiply the daily rate by the number of days in your billing cycle. If you have a 27-day billing cycle, multiply 0.55 by 27. On a $1,000 balance with a 20% APR, you'll pay $14.85 in interest monthly. 

Types of APR

Your credit card may charge a different APR depending on how you use it. For example, some credit cards have a separate APR for balance transfers, which may be higher or lower than the standard APR. The APR on cash advances is usually considerably higher than for standard card purchases. If you pay late or otherwise violate the terms of your card agreement, you may have to pay a penalty APR.

Examples of different types of credit card APR include:

The purchase APR is the interest you pay on standard purchases when you carry a balance.

If you use your credit card to get cash, you'll typically pay a separate, higher APR that doesn't have a grace period.

You can transfer a balance from one card to another. When you do, you'll usually pay a different APR on the transferred amount. Some cards offer a lower APR for balance transfers to entice you to switch.

Credit cards sometimes offer a promotional or introductory APR, such as 0%, to encourage you to open a new account. The promotional rate may apply to new purchases for the first few months or year that you have the card.

If you pay late or miss two or more payments, your card issuer may charge you a penalty APR, which is often much higher than the purchase APR. (Setting up recurring monthly payments or payment alert reminders can help you avoid late payments.)

Read the terms and conditions closely when signing up for a new credit card. The card offer should include a table with rates and fees that make it easy to see your APR.

APR vs. APY

While APR is how much you owe on a balance, annual percentage yield (APY) refers to how much an interest-bearing account, such as a savings account, can earn yearly.

APY is also expressed as a percentage and includes the interest rate on an account, plus how frequently interest compounds on the account. While you want an APR to be as low as possible, you want an APY to be as high as possible, as it helps you earn money.

How to lower your APR on a credit card

It may be possible to reduce your APR in three ways:

Credit card companies typically offer better rates to people with higher credit scores. Make payments on time and avoid opening multiple accounts at once to keep your score trending upward. If you're behind on any credit cards or loans, get current on your payments to increase your score.

Card companies occasionally offer promotional balance transfer APRs to encourage people to open new cards. If you carry a balance on a card with a high APR, it can be worthwhile to open a balance transfer card and take advantage of the lower rate.

The bottom line on APR

As with any financial agreement, familiarize yourself with your credit card's terms and conditions, including its APRs. Remember that APR is only applied if you're carrying an outstanding balance on your card. You can typically avoid paying any interest charges if you pay off your card balance before the statement period ends each month.

Selecting the right credit card shouldn't be complicated. Learn about all our credit card options and how we're ready to help you reach your money goals. Whether you want to earn cash back rewards or transfer a balance, find the card that will fit your lifestyle and needs.