What Is APR? What You Need to Know

Businessman using tape measure to measure the height of the percentage symbol.
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APR stands for annual percentage rate, and it is an essential concept for anyone borrowing money to understand. It is the total rate of interest 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 mortgage loans. Since credit card APRs are typically much higher than APRs for other types of loans, knowing the APR on a credit card is crucial.

What Is APR on a Credit Card?

A credit card’s APR determines the interest paid on money borrowed for a period longer than the credit card billing cycle. Most credit cards do not charge interest on purchases if the balance is paid in full by the due date. A credit card’s APR 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 statements.

How Does APR Work?

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

A loan issuer — typically a bank — is responsible for setting an APR. Usually, the APR is based on the U.S. prime rate, which is the best rate that lenders offer their most reliable customers. Banks then charge a margin of profit on top of the prime rate. Typically, the higher a borrower’s credit score, the lower their APR.

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A credit card APR might be 15% or lower for cardholders with excellent credit scores or as high as 30% for those with poor credit scores.

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 factors in the total cost of the loan.

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

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

What Is the Difference Between APR and Effective Annual Interest Rate?

Banks use either a daily or a 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 accrual to the credit card balance. This accrual rate is known as the Effective Annual Interest Rate. That rate is the actual interest rate charged on a financial product as a result of the compounding of the credit over a period of time.

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Good To Know

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

What Are the Different Types of Credit Card APR?

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

Introductory APR

An introductory or promotional APR is typically extended to a new cardholder for a specified period. This APR is often lower than the regular one, 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 returns to its regular APR once the introductory period ends or if the cardholder fails to make on-time payments. 

Balance Transfer APR

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 on-time payments. 

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Fixed APR

Introductory and balance transfer APRs are typically fixed through the introductory or balance transfer period. The rate is locked and will not change until the period ends or a cardholder fails to make on-time payments. Except during introductory and balance transfer periods, most credit cards do not have a fixed APR. The rate may stay the same for an extended period, but this just means the card issuer has not changed it.

Variable APR

Most credit cards have a variable APR. A variable APR changes according to 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 typically variable.

Cash Advance APR

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

Penalty APR

If a cardholder is more than 60 days past due on a payment, the card issuer may apply a penalty APR. A penalty APR may be as much as 29.99% and may apply to all purchases on the card, including additional purchases. A card issuer will usually not lower a penalty APR until a cardholder shows a history of on-time payments.

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 lowest 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%, a 22% APR might be a good rate for someone with poor credit, but would not be a good rate for someone with good credit. It might not be as good as the lowest rate, but it is lower than the 29.99% some cardholders with poor credit scores have. This is why it is important to compare credit card APRs before applying for a new card.

Takeaway

APR plays a vital role in how much it costs to borrow money. Credit cards especially can be costly if the APR is high and the balance is not paid off in full each month, so it is essential to know what the APR is on a credit card. 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 elect to raise an APR if a cardholder is more than 60 days past due on a payment.

FAQ

Here are answers to some common questions about credit card APR.
  • What is 24.99% APR on a credit card?
    • A 24.99% APR means that if a cardholder carried a $100 balance for a year, they would accrue almost $25 in interest to pay on that $100. Of course, no one carries the same balance for a year, but this demonstrates how costly a high-APR card can get if not paid in full each 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 scores. So 22% is a high APR for someone with excellent credit. It is not high for someone with fair to poor credit.
  • Is 24.99% APR good for a credit card?
    • A 24.99% APR is high for someone with good to excellent credit, but it is in line with an APR for fair to poor credit. It isn't the worst APR there is, but it will get expensive if the cardholder carries a balance.
  • Do I pay APR if I pay on time?
    • If you pay off your full credit card balance on time each billing cycle, you will not pay APR. Typically, APR is only accrued on outstanding balances. If you do not pay off the full balance and instead carry a balance from month to month, you will pay APR on the remaining amount.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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About the Author

Andrea Norris has been in the web publishing business for the past 15 years both as a content contributor and a copy editor specializing in personal finance, frugal living, home and auto topics. She writes both short and long-form content and is well-practiced in SEO keyword research and writing.
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