What Is APR on Credit Cards? Your Complete Guide to Understanding Credit Card Rates

By Holger Reinel | Updated on January 17, 2020


what is apr on credit cards

APR stands for annual percentage rate. In a credit card, APR represents the interest rate you’ll pay when you carry a monthly balance.

In some cases, those rates could be as high as 29% so before signing the credit card agreement, be sure to understand the following:

  • A higher credit score means you may qualify for a lower APR.
  • Understanding your credit card’s APR will allow you to avoid paying high-interest fees.

In this post, we answer the most common questions about credit card APRs so that you avoid paying those high credit card fees.

Annual Percentage Rate

What most people don’t know is that each credit card has multiple APRs. That’s right; even though you might know what your interest rate is on purchases, cash advances, balance transfers, and others, each has an entirely different rate.

What is APR on a Credit Card?

A credit card’s APR is the total cost of borrowing per year but it does not include other charges like missed payment fees and cash advance fees. Aside from the money you spend on it, the main cost of using your credit card is the interest fee you’re charged for borrowing money from the credit card company. For credit cards, interest

When it comes to credit cards, APR and interest rates are the same thing.

When you make a purchase, the amount you spend increases the balance you owe. Each month will have a due date to submit your payment; if you don’t make a payment by this date, you’ll be charged interest on the outstanding balance.

To find the APR on your credit card, look through your credit card agreement; you can also find it on your credit card statement or by calling a customer agent using the phone number on the back of your card.

How is APR Charged and How Often?

Most credit cards carry a 21 days grace period, so you can completely avoid paying interest as long as you can pay the full balance by the due date. If you don’t, you’ll be paying interest on the balance and those interests accrue daily.

You heard that right, daily… So if you want to know how much interest you’d pay daily, take your annual APR. Let’s assume your credit card has a 20% annual rate; then divide that number by 365 and voila! You have your daily interest rate.

Daily Interest Rate

Let’s assume that this month you bought $1,000 worth of stuff using your credit card; when you received the statement you only had $600 available, so you paid $600 to your credit card which left you with a $400 balance. That’s simple, right?

That daily rate will then be applied to your account, which means the amount of interest that will be charged tomorrow, will be higher than the amount of interest charged today.

Interest fees on top of interest fees are referred to as compounding. It is daily compounding, combined with a high-interest rate, that makes credit card interest fees particularly expensive and hard to pay off.

What Is a Good APR for a Credit Card?

Most APRs on a credit card carry very high rates compared to mortgage loans and lines of credit. A more suitable question would be how does your credit card APR stack up against other credit cards? Naturally, the lower your APR, the better.

According to data from the Federal Reserve’s website obtained by My Home Answers, the average APR for all credit cards is 15%.

  • High:             29%
  • Average: 15%
  • Low:             11%
Average Credit Card Interest Rate

As you can tell, there is a wide range between the lowest and the highest APR, but even the lowest rate is still very high compared to other types of loans.

Retail cards have the highest rates, but they usually carry benefits or reward points, but if you carry a balance the high interest can easily wipe out any benefit received from reward points, so you think twice before allowing yourself to carry a balance with this type of credit card.

How Are APRs On A Credit Card Determined?

APR can vary greatly, but besides the prime rate, APR mainly depends on the type of credit card and your credit score. If you have a bad credit score chances are your APR will be higher than people who have the same credit card but who have a better credit score.

Why?

Lenders interpret that if a borrower has a low credit score, there is a higher risk of default; to compensate for the higher risk, lenders may approve a credit card application but attach a much higher interest rate (APR).

However, if you pay your credit card balance in full every month, you won’t pay any interest on your purchases. In this case, the APR becomes less important because you won’t have a balance for interest to be applied to.

Using your credit card to make a purchase is like getting a loan for a month. If you pay it off fully that month, you don’t pay interest; however if you carry a balance to the following month, that’s when the APR comes in.

How to Get a Good APR on Your Credit Card

The easiest way to get a better interest rate is to call the credit card company and ask for a better rate. Here is where keeping a good payment history, and a having a good credit score will pay off.

Ask to get a better interest rate on your account while using your payment history to back you up. If they offer a better rate but not what you’re looking to get, be ready to negotiate.

You want to avoid falling prey to this debt trap. Think about it, the average rate of return for a good investment in the stock market is a return of 8% – 10%. However, credit card companies are over 15% on average.

Here is a script you can use to call your credit card company to ask for a better interest rate:

YOU: Hi, I’d like to request a lower interest rate on my credit card

REP: Umm… why?

YOU: As you can tell from my payment history, I have a great payment history, I pay my bills on time, and continue to be a loyal client. More importantly, other credit institutions are offering better rates than the APR my credit card has.

REP: Let me see what I can do for you.

REP: I can lower your interest rate from 15% to 11% as that is the lowest rate this type of card carries. Would that work for you?

When that conversation ends, go ahead and punch the air in celebration because you just negotiated a better interest rate on your credit card.

But remember, credit card fees are high; even if you’re able to reduce your APR from 15% to 11%, that’s still a high rate. Your goal should be to pay off that credit card balance in full every month.

Paying off credit card

If you pay off your credit card balance every month, it doesn’t matter whether your APR is 11% or 40% because you won’t be paying any interest.

You’ll be getting an interest-free loan for a month, every month.

Now that’s a way to make the credit card company work for you and not the other way around.

The interesting thing is that when you do that for a few months, credit card companies are going to start chasing you offering more credit at much lower interest rates; or how about a balance transfer at 0% interest for a year?

Try to resist the temptation of using more credit card debt; there will be a time when you don’t pay on time and then the credit card company raises the rate to 29% or another high rate, and that’s going to be hard to pay off.

If You Must Carry Over a Credit Card Balance

Interest rates (APR) are influenced in a big way by your credit score. That’s something that you can control. The better your credit score, the lower the APR is going to be.

Related: How to Repair Your Credit Score

When you are carrying over credit card balance to other months, lowering your APR can potentially save you hundreds of dollars, so your goal number one is to make that APR the lowest it can be. Here is how:

  • Pay your bills on time, every month: Missing payments can set back your credit score fast. Set up your bills to be automatically paid so that you are never late.
  • Ask for a credit limit increase: The easiest and fastest way to increase your credit score is by getting a credit limit increase. A better credit score means you will have higher negotiating power to request a better interest rate on your credit card.
  • When you carry over a balance, use no more of 30% of your credit limit: This is referred to as the credit utilization ratio. As the amount you owe gets closer to the credit limit, lenders see this as a sign that you’re getting closer to being maxed out and that affects your credit score.

Choosing the Right Credit Card

The reason why some cards have a higher or lower APR is that those cards are designed for specific uses.

For example, credit cards designed to help you build a better credit history typically carry a high APR. Why? Because the lender is taking a chance. With no payment history, the lender does not know if they’ll get paid back so they compensate the risk with a higher interest rate. It’s that simple.

Consider a 0% Interest Balance Transfer

If you’re carrying a balance on your credit card it means you’re paying those high-interest fees. If that’s the case, consider moving the balance to another card that offers 0% interest on balance transfers for a promotional period.

0% interest sounds too good to be true right? You can get it for an introductory period of usually three to six months, but even that introductory period can mean saving hundreds in interest fees.

0% Interest Balance Transfer

The main reasons to get this type of card is for the following reasons:

  • To make a large purchase such as appliances or furniture.
  • To make a balance transfer from a high-interest account.

With both of these cases, a 0% APR credit card can help you save money if you continually keep a balance on a card. However, keep in mind that once the introductory period ends, you should pay off the balance to avoid paying those high interests.

Why do credit card companies offer 0% balance transfers?

It’s a trick! Lenders know that at the end of the introductory period most people will still have a balance owing, so they’ll make their money back once the 0% period ends.

For example, let’s say you took a balance transfer offer that has a 0% APR for three months; after the three months, the rate goes up to 20%. For the offer to make sense for you financially, you have to be able to pay off the entire amount before the 0% rate expires.

People say, “But Holger, how about my other expenses? How can I pay off the credit card balance that quickly?”

A 0% rate is only impressive if you can pay off the amount during the promotional period. Expensive purchases require a different type of loan. That’s why people don’t buy cars, or houses using a credit card.

Different Types of Credit Card APRs

Now that you understand what APR in a credit card is, let’s explore the different types of APR.

Purchase APR is the interest rate charged on credit card purchases that you don’t pay off each month.

Cash Advance APR is a different, much higher rate that is charged when you withdraw funds from your credit card account and don’t pay off at the end of the month.

Balance transfer APR is special interest rates offered to customers to transfer a balance from a high-interest account to the balance transfer APR. It’s a popular tactic used by credit card companies to attract customers from other credit card companies.

Some cards offer rates as low as 0% but only for a short period such as 6 months or a year. After this time, the interest rate goes up to the standard purchase APR.

Penalty APR is an extremely high (higher than 30%) a creditor could charge when you fall behind on payments for over 60 days. If you have a series of missed payments, a penalty APR can kick in which can significantly affect your credit score.

To reinstate your original APR after a penalty APR you will need to make on-time payments for at least six months.

The bottom line

Understanding APR on your credit card can seem like tricky math with percentages and fancy numbers, but it is not. Put simply, APR is the annual percentage rate you pay to borrow money from your credit card account.

How high or low that interest rate is can make the difference between paying $10 or $100 in interest. That’ huge, and credit card companies are making a lot of money off people who can’t pay off their balance at the end of a billing cycle.

So, when comparing credit cards, pay special attention to the different APRs stated in the terms and conditions and make sure you’re comparing apples to apples. The important thing is a high APR can easily overwhelm anyone’s personal finances when you carrying balances each month.

Shop around – Before deciding the type of card you want, check out for potential fees, such as interest charged on cash advances, balance transfers, and annual fees. You do have control over a great deal of the way APRs are determined.

Follow these steps:

  • Pay your bills on time
  • Find out the best APR offered in the market and request your lender to give you a better rate.
  • Keep your credit utilization below 30% of your credit limit
  • Avoid applying for multiple credit cards and do not cancel accounts with good payment history.
  • Monitor your credit score

If you already have a credit card and want to find out the specific APR that applies to your account, check your statements or call customer support using the number on the back of the card.      

Bonus tip

If you’re struggling to pay off a credit card balance it might be that you need a higher income. The easiest way to increase your income without getting a second job is by asking your boss for a salary increase.

Our Salary Negotiation course is a step-by-step simulation where you will learn how to ask for a salary increase.

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