APR on a Credit Card: What It Stands for and How It Works
The APR on a credit card means “annual percentage rate.” It is the yearly interest rate that the financial institution that issued your credit card charges you for using their credit line or borrowing their money. Although an APR is expressed annually, the charges are usually deducted monthly. How does it work, then? Read on to learn more.
How Does an APR Work on a Credit Card?
Credit card issuers charge APR on a monthly basis even though it is expressed as an annual cost. They do it by dividing the interest rate by 12 since there are 12 months in a year.
Companies that provide credit cards often give their customers a grace period that applies to new purchases, which is usually between 21 and 55 days. You only pay the sum you owe each month if you make purchases and pay off your debt balance by the due date.
The agreed interest is charged to your outstanding debt if you have a balance on your card at the conclusion of each billing cycle. In other words, if credit card holder pays their balance in full and on time every billing cycle, they will not be charged interest.
Where to Find the APR on Your Credit Card
Your monthly billing statement will include information regarding how your cost of debt is computed, along with your card issuer's APR. That is, the conclusion of your monthly bill is often where you should see your credit card APR. The statement will have a section labelled "Interest Charge Calculation" or another similarly titled part.
Additionally, you can find the APR on your credit card on the website of the issuer. It is also visible after accessing your account online or using the mobile app of your credit card provider. Furthermore, when you sign into its digital platform, you can frequently monitor your APR.
Note: It is strange but not impossible that you may have difficulty finding the APR on your credit card. In such a situation, get help by contacting the customer support team of your financial institution or credit card issuer.
Types of APR
There are different types of APR. They include introductory APR, purchase APR (which is the most talked about), cash advance APR, the balance transfer APR, and penalty APR.
Introductory APR
This refers to a promotional interest rate that applies to a credit card until the expiration of the introductory period. It is usually lower than the regular APR of the card—often less than 1%.
Financial institutions use introductory APRs to attract new customers to their lines of credit. Some of them offer 0% interest credit cards in their welcome packages. When the term for the introductory APR ends, the cardholder’s balance will be charged the regular purchase APR.
The period of the introductory APR varies from one credit card provider to another. For example, Capital One offers a 0% APR that lasts for 15 months on its Quicksilver Cash Rewards Credit Card.
Purchase APR (Fixed or Variable APR)
When people talk about the interest on a credit card, they often refer to its purchase APR, which is also called a “regular APR.” It is a fixed or variable charge that applies to all online, over-the-phone, and in-person purchases made using a credit card.
The purchase APR on a card could be between 10% and 27%, depending on the card issuer’s terms and conditions. For example, buddybank charges a variable purchase APR that is between 11.35% and 12.66%, based on the amount of the expenditure and the payment term (which can be 6 months or one year).
Cash advance APR
This interest rate applies when you use your credit card to borrow cash. It is usually higher than the purchase APR on your card. In that way, you are not encouraged to make cash withdrawals with your credit card. That is because it is seen as borrowing against your credit. You should only use this option in an emergency.
The cash advance APR on many credit cards is between 17% and 30%, and there is usually an additional transaction fee. The interest is charged at the time of withdrawal, and there is no option like a grace period between the withdrawal date and the payment due date. So, pay off your cash advance APR on time.
Balance transfer APR
The interest rate that a financial institution charges a cardholder for moving the balance on an existing credit card to another (for instance, a new card) is called a balance transfer APR.
A balance transfer APR can be in the form of an introductory balance transfer APR. It serves a similar purpose as a regular introductory APR, which is to attract new customers to a credit card.
Penalty APR
The penalty APR on a credit card is one of the highest that you may find. It is used to “punish” the cardholder for a returned, missed, or late minimum payment.
One of the best fintech companies in the digital lending market, Capital One, charges a penalty APR of 29.4%. Some credit card issuers deduct up to 30% in penalty APR.
How to Calculate APR on Your Credit Card
It takes knowing the right way to calculate credit card APR to determine the amount your financial institution will charge you for not paying your full balance. We will now show you how to calculate the APR on your credit card.
Let us assume that you own a credit card with a €2,000 average daily balance, a 30-day billing cycle, and a purchase APR of 20%. Below is how interest will be charged on the credit card if you fail to pay your outstanding balance in full and on time.
First, you need to calculate your daily interest rate using the APR and the number of days in a year, which gives:
20% x 100/365 = 0.055% daily, which is 0.00055.
Next, you need to calculate the amount you will be charged monthly. You can do that by multiplying all the values as follows:
(average daily balance) x (daily billing cycle) x (daily interest rate)
€2,000 x 30 x 0.00055 = €33.
Therefore, if you do not pay off your balance and minimum payment in time, the additional amount you will be charged in interest on your card for the agreed billing cycle is €33. Every month, this cost will be recalculated based on your average daily balance until it reaches €0.
What Factors Can Influence Your APR?
The APR on your credit card can be impacted by several factors. They are as outlined below.
Your credit history
The lower your credit score, the higher the APR lenders are likely to charge you, and the reverse is usually the case if you have a good credit score. Why is that so? With a low score, you are more likely to default on your payments. So, find out what makes a good credit history and what can hurt your credit score in our previous posts.
Your income and debt levels
The factor of consideration here is your debt-to-income ratio (DTI). It is a metric that is used to determine whether your debt is higher or lower than your gross monthly income. Your DTI should be low (below 1) to make you a more attractive borrower and qualify you for a low-APR credit card. Nonetheless, with more debt than income, there are still some credit cards that can easily be approved for you.
The type of loan
All loans are not the same—some are secured while others are unsecured. Hence, they do not charge the same APRs, simply because some involve more risks and tend to be more expensive to get. While auto loans and mortgages usually charge low APRs because the asset (car or home) is used as collateral, unsecured debts like credit cards and personal loans often attract high APRs.
The prime rate
Financial institutions and lenders in general use the prime rate to fix and adjust their interest rates. In the United States, the federal funds rate of the Federal Reserve influences the prime rate. This rate is important because it can determine the rate that your lender or bank will charge you when you apply for a new credit card or loan. Therefore, under normal conditions, your APR cannot be lower than the prime rate.
The lender’s fees and charges
The APR on your credit card might be high because your lender added one or more fees on top of it. However, the added charges depend on the type of loan or credit. So, not every credit card’s APR has extra charges included. To find out whether there are additional fees on your APR, contact your lender.
How to Save Money on Credit Card APR
Even though owning a credit card may help you build your credit history, get travel rewards, and receive cashback on your expenses, it is still necessary to ensure that interest charges are minimised or, where possible, avoided.
The following are our tips for paying less on credit card APR and other charges:
- Transfer your balance to a credit card with a 0% introductory APR if you have a large credit card debt.
- Ensure to make full payments on your credit card every month.
- Avoid making late payments on your credit card balance.
- Choose low-interest credit cards.
- Avoid using your credit card for personal or business expenses that you should never charge on it.
FAQ
A good APR for any credit card is one that is less than the national or federal average credit card rate in your country. In the past few months, the global credit card APR has been between 15% and 20%.
An APR on a credit card can be considered too high when it is beyond 30%. But before you scream that a financial institution or lender is offering you an outrageous interest rate, check your credit score to see if you need to improve your creditworthiness.
For a line of credit, a low APR is better than a high one. Remember that an APR is the cost you incur for borrowing money and defaulting on payment.
There are several reasons why your APR may be too high despite your good credit. One of the common causes of a high APR is taking a cash advance.
Yes, you should worry about a high APR because it is the cost you pay for borrowing money.
The Bottom Line
Even if your credit card offers so many perks, it is wise to pay attention to its APR. High-interest rates can add up and offset the cashback and other rewards you may have earned on the card.
Today, you have learned about credit card APRs, how to calculate the purchase APR, and ways to reduce all related costs. What are you going to do next? Apply the lessons to always keep your income above your debt and build a good credit history.
Remember to browse our collection of the most cost-effective payment cards for individuals and businesses, read our overviews of them, and follow our blog for more financial guidance.
