What is APR?

A credit card’s APR, or annual percentage rate, is the interest rate a financial institution charges when you carry a credit card balance from month to month. The higher the APR, the more interest you will owe, which can make it difficult to pay off a large credit card balance as the interest compounds daily. 

What is APR (Annual Percentage Rate)?

When it comes to credit cards specifically, APR and interest rates can be used interchangeably. APR is defined by the Consumer Financial Protection Bureau as the price you pay for borrowing money. For credit cards, APR is the interest you are charged on a balance you carry from month to month. 

While most cards advertise a range of interest rates, say 20.49% to 29.24%, you won’t know your card’s APR until after the issuer reviews your credit profile and approves your application. A general rule of thumb is the higher your credit score, the more likely you’ll be approved for a lower APR, but that’s not always guaranteed. To know the range of rates associated with your card, check the terms and conditions of your application or reach out to your card issuer. 

Looking to pay off high interest debt with a promotional APR offer? See our list of the best 0% intro APR cards to find the right one for your needs.

Once you start using your credit card for purchases, if you don’t pay off the entire balance every month by the statement due date, you’ll be charged interest on the remaining balance you don’t pay, plus any new charges made with the card. This is called a revolving balance.

Your credit card will most likely come with different APRs, depending on how you use the card. For example, it’s fairly typical for a card card to have a higher APR for cash advances and a penalty APR if a payment is more than 60 days past due or if your payment is returned for insufficient funds. 

How APR works

When you purchase something with your credit card, you are effectively borrowing money from the card issuer to make that purchase. You typically have a 21-day grace period between the end of the billing cycle and when your payment is due in order to pay off what you borrowed without incurring interest charges.

If you pay your monthly balance in full within that grace period by the due date, you’ll generally avoid interest charges, unless:

• You didn’t pay off the entire balance in the previous billing cycle. The only way to avoid interest charges is to pay off the entire balance every month. Once you start revolving a balance, interest charges will be assessed on a daily basis on any unpaid balance.
• Your payment is returned for insufficient funds. This will generally trigger a penalty APR and interest will continue to accrue on the unpaid balance. 
• You opt to spread out payments for a particular purchase through a card’s special financing offer. Some issuers allow you to break down the cost of a large purchase over several months and either assess a fee instead of interest, but some of these plans may assess a different interest rate that is assessed for the duration of the financing deal.
• You used your card for a cash advance. If you withdraw money from your credit card’s line of credit at an ATM, interest will start accruing immediately and generally at a higher interest rate.

How to calculate your credit card’s APR

While your credit card’s APR is expressed as an annual rate, it is actually broken down to a daily periodic rate (DPR) that compounds daily on any unpaid balance.

How to calculate it

While the credit card issuer will include how much interest you are being charged on your monthly statements, it can be helpful to know how it’s calculated. 

Your DPR is your APR divided by 365 days in a year. For example, if your card’s APR is 18.99%, then your DPR is 0.0520 (18.99 ÷ 365 = 0.0520). Your DPR is then added to your average daily balance, which is figured by adding up your daily credit card balances divided by the number of days in the month. 

Here’s an example of how your interest charges are broken down daily and monthly:

APR	DAILY PERIODIC RATE (DPR): DIVIDE THE APR BY # OF DAYS IN THE YEAR (365)	AVERAGE DAILY BALANCE (ADB)	DAILY INTEREST CHARGE: MULTIPLY DPR BY AVERAGE DAILY BALANCE	MONTHLY INTEREST CHARGE: MULTIPLY DAILY INTEREST CHARGE BY # OF DAYS (30) IN THE MONTH
18.99%	0.052	$2,500	$1.30	$39.00

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What affects APR?

Credit cards are advertised as having either a range of APRs (variable rates) or just one APR (fixed rate), but the majority of credit card APRs are variable. A variable APR means that the interest rate you get can change based on underlying indexes like the prime rate set by The Federal Reserve. The federal prime rate is the lowest interest rate financial institutions will lend money. 

When you apply for a credit card that offers a range of APRs, the issuer will review your credit information to determine which APR to give you. 

If your credit reports show missed payments on a loan or another credit card, you may end up with a higher APR.

This process is quite different from applying for a personal loan, where once your application is reviewed, you are provided with what your interest rate will be before you agree to accept the loan terms. With credit cards, you won’t know what your APR will be until your application is approved.

Different types of APRs

Depending on how you use it, most credit cards come with different rates, such as promotional rates or an intro APR. Here’s a breakdown of the different types of APRs you may encounter with a credit card:

Purchase APR: The purchase APR is assigned to you once approved for a credit card and is applied to the purchases you make with your credit card. If you do not pay off your entire balance due by the statement due date, any remaining balance will begin to accrue interest based on the calculation illustrated above. Your purchase APR can be found on your monthly credit card statement. You can avoid interest charges entirely by paying off the entire balance every month during the grace period.

Cash advance APR: Most credit cards assess a higher APR when you use your credit card at an ATM to withdraw cash. Additionally, there’s often a cash advance fee tacked on each time you use your card this way. When you use your credit card for a cash advance, there is no grace period as interest will accrue immediately on the cash advance amount. Generally speaking, you should only use your credit card for a cash advance in emergencies.

Intro APR: Quite a few credit cards these days offer a promotional intro APR period in which you pay little to no interest on purchases for a specified period of time. For example, the Chase Freedom Unlimited® offers a 0% intro APR for the first 15 months on purchases and balance transfers, then a variable APR of 20.49% to 29.24%. An intro transfer fee of either $5 or 3% of the amount of each transfer, whichever is greater, applies in the first 60 days. After that, a fee of either $5 or 5% of each transfer applies. 

Penalty APR: If you violate the terms of your credit card agreement, you could incur a penalty APR, which can be significantly higher than the rate on purchases. Examples of term violations that could trigger this penalty include having an outstanding balance that is more than 60 days late, having a payment that is returned for insufficient funds or going over your credit limit. There are also late fees or returned payment fees that will be added to your balance. The penalty APR will apply to any existing balance as well as any new purchases you make with the card. A penalty APR can be remedied if you make six consecutive, on-time payments on your existing balance, but it may still be assessed on any future purchases.

Pay over time APR: Some card issuers offer the ability to finance a certain purchase over time for a fee instead of interest, but some of these “buy-now-pay-later” plans may charge a different interest rate. Some examples of these plans include Citi Flex Pay, My Chase Plan®, U.S. Bank ExtendPay® and American Express’ Pay Over Time. Read any fine print that comes with these plans so you know what to expect. 

APR vs. interest: What’s the difference?

Loans and mortgage interest rates and APRs may be different as the APR also includes any fees and expenses charged by the lender. For example, that’s why your APR on a mortgage may be higher than the interest rate. But interest on these types of loans doesn’t compound daily like credit cards.

For credit cards, the APR and interest rate terms are used interchangeably and mean the same thing. 

What’s a good APR?

A good APR for a credit card is generally one that is below the national average of 22.16% (as of May 2023). Due to recent Federal Reserve rate hikes, it may be difficult to find a card these days with APRs below the national average. Credit unions typically offer lower-APR credit cards. And if you’re looking to rebuild your credit, credit cards that can help you do that typically come with much higher-than-average APRs. But, if you only charge what you can afford to repay at the end of the month, you can avoid interest charges entirely.

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