What Does APR Mean and Why It Matters for Borrowing

If you’re wondering, “What does APR mean?” It stands for annual percentage rate — which is the yearly cost of borrowing money, including interest and fees. APR plays a role in many consumer financial products, such as credit cards, auto loans and mortgage loans. Since credit card APRs are often much higher than those for other types of loans, understanding how APR works — and how it affects your balance — is especially important.

What Does APR Mean? Quick Definition

APR is the yearly cost of borrowing money, expressed as a percentage. It includes interest plus fees. You’ll see APRs on credit cards, mortgages, auto loans and more — and they vary based on your credit and lender terms.

How Does APR Work?

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

Here are some key points to know:

• 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 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.
• 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.

How APR, APY and Interest Rates Compare

These terms are related but all have slightly different calculations. Here are a few points to know about each:

APR vs. Interest Rate

• The interest rate is the base cost of borrowing.
• APR includes the interest rate plus any fees.
• If there are no other fees, APR and interest rate are the same.

Example

A cash advance of $1,000 on a credit card comes with 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%.

APR vs. Effective Annual Interest Rate

• APR is divided into daily or monthly periodic rates.
• These rates are applied to your balance over time.
• The effective annual rate includes the effects of compounding, making it slightly higher than the stated APR.

APR vs. APY

• APR is the interest you pay on debt like credit cards and loans.
• APY is the interest you earn on savings or investments.
• Look for low APRs when borrowing and high APYs when saving.

APR vs. APY vs. Interest Rate: At a Glance

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 APRs?

Credit cards often have more than one APR — here’s what each type means for your balance.

• Introductory APR:
  • Usually offered to a new cardholder for a specified period. This APR is often lower than the regular one, sometimes as low as 0%.
  • Credit issuers often offer this APR to entice people to apply for a new card.
• Balance transfer APR:
  • 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. 
  • Note, however, that transfers are rarely free — credit card issuers usually charge a fee of about 3%.
• Fixed APR:
  • This means the rate is locked and will not change until the period ends or a cardholder fails to make on-time payments.
  • Most loans have a fixed APR.
• Variable APR:
  • A variable APR changes according to the prime rate lenders charge their best customers. To calculate the variable APR, they add a margin to the prime rate, so a cardholder’s APR may increase if the prime rate increases.
  • Most credit cards have a variable APR.
• Purchase APR:
  • Rate used for all purchases other than those made during an introductory period.
  • The purchase APR is typically variable.
• Cash advance APR:
  • Typically higher than the purchase APR and will apply to the cash advance balance until it is paid off.
  • Cardholders who borrow cash from a credit card must pay a cash advance APR.
• Penalty APR:
  • If a cardholder is more than 60 days past due on a payment, the card issuer may apply a penalty APR.
  • 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.

Here’s an example:

• A credit card has a variable APR between 13.99% and 28.99%.
• A 25% APR in this case might be a good rate for someone with fair credit.
• This APR would not be a good rate for someone with good credit.

It’s important to compare credit card APRs before applying for a new card.

How To Calculate Your Credit Card APR

Calculating your credit card APR can be done in just a few steps:

1. Find your daily periodic rate.
   • Divide your APR by 365 (or 360, depending on the lender).
     • 20% APR example: 0.20 ÷ 365 = 0.0005
2. Calculate your average daily balance.
   • Add up your daily balances over a billing cycle and divide by the number of days.
   • Example: $50 charged on Day 1, $50 on Day 16.
   • ($50 x 15 days) + ($100 x 15 days) = $750 + $1,500 = $2,250
   • $2,250 ÷ 30 = $75 daily balance
3. Multiply the daily rate by the average daily balance.
   • Example: 0.0005 x $75 = 0.0375 interest per day
4. Multiply the daily interest by the number of days in the billing cycle.
   • Example: 0.0375 x 30 = $1.13 in interest charges for the month
   • The answer is $1.125 per month in interest.
5. Add the interest to your total charges.
   • Example: $100 in purchases + $1.13 = $101.13 total balance due

Final Take

Understanding what APR means — and how it differs from interest rates or APY — can help you avoid unnecessary borrowing costs. Always compare APRs when shopping for credit cards or loans, and try to pay off your balance in full each month. A little knowledge about APRs can save you hundreds over time.

Daria Uhlig and Caitlyn Moorhead contributed to the reporting for this article.