What is APR on a credit card? (2024)

When you have a balance on a credit card, you typically need to pay interest on it. Credit card companiestake your credit score into accountwhen setting your APR, with a higher credit score generally translating to a lower interest rate. A lower APR is usually better, as it costs you less to borrow using a particular credit card.

While almost all credit cards have an APR, you don't always have to pay it. Most cards have a grace period, during which you can pay the balance due in full without owing any interest.

If you use a card to get acash advance, you'll also have to pay interest and fees, and those are usually higher than the APR on your standard balance.

Fixed-rate vs. variable APR

Credit cards often have a variable APR, meaning your rate can go up or down over time. Variable APRs are tied to an underlying index, such as the federalprime rate, which is the lowest interest rate at which banks will lend money. If the prime rate increases, your card's APR also increases, and vice versa if the prime rate goes down.

In contrast, a fixed-rate APR will remain the same from the time you open the credit card account.

A good APR on a credit card depends on several factors. An ideal APR may be 0%, but that can be nearly impossible to find unless you open a card with a special promotional APR. In that case, the APR won't stay at 0% forever.

To determine if an APR is good or not, look at the average rates for people with the same credit score as you.For someone with a good or very good credit score,an APR of 20% could be good, while a 12% APR may be good for someone with an excellent score. If your score is lower, an APR of 25% could be considered good. No matter your score, the lower the APR, the better.

When you know the APR on your credit card, you can use it to calculate how much you may have to pay on a balance. To do that, you'll need to figure out the daily periodic rate, orhow much credit card interestyou're charged per day on your balance.

Say you owe $1,000 on a card with a 20% APR. Here's how to figure out how much you'll actually pay:

1. Divide 20% by 365, the number of days in a year: 0.2/365. You'll get 0.0548% as a daily rate.
2. Multiply the daily rate by the balance you owe: 0.0548% x 1,000. You'll get 0.548, or about 55 cents per day.

To see how much you'll pay per month, multiply the daily rate by the number of days in your billing cycle. If you have a 27-day billing cycle, multiply 0.55 by 27. On a $1,000 balance with a 20% APR, you'll pay $14.85 in interest monthly.

Your credit card may charge a different APR depending on how you use it. For example, some credit cards have a separate APR for balance transfers, which may be higher or lower than the standard APR. The APR on cash advances is usually considerably higher than for standard card purchases. If you pay late or otherwise violate the terms of your card agreement, you may have to pay a penalty APR.

Examples ofdifferent types of credit card APRinclude:

Purchase APR

The purchase APR is the interest you pay on standard purchases when you carry a balance.

Cash advance APR

If you use your credit card to get cash, you'll typically pay a separate, higher APR that doesn't have a grace period.

Balance transfer APR

You cantransfer a balance from one card to another. When you do, you'll usually pay a different APR on the transferred amount. Some cards offer a lower APR for balance transfers to entice you to switch.

Promotional or introductory APR

Credit cards sometimes offer apromotional or introductory APR, such as 0%, to encourage you to open a new account. The promotional rate may apply to new purchases for the first few months or year that you have the card.

Penalty APR

If you pay late or miss two or more payments, your card issuer may charge you a penalty APR, which is often much higher than the purchase APR.(Setting uprecurring monthly paymentsor payment alert reminders can help you avoid late payments.)

Read the terms and conditions closely when signing up for a new credit card. The card offer should include a table with rates and fees that make it easy to see your APR.

While APR is how much you owe on a balance,annual percentage yield(APY) refers to how much an interest-bearing account, such as a savings account, can earn yearly.

APY is also expressed as a percentage and includes the interest rate on an account, plus how frequently interest compounds on the account. While you want an APR to be as low as possible, you want an APY to be as high as possible, as it helps you earn money.

It may be possible to reduce your APR in three ways:

Improve your credit score

Credit card companies typically offer better rates to people with higher credit scores. Make payments on time and avoid opening multiple accounts at once to keep your score trending upward. If you're behind on any credit cards or loans,get current on your paymentsto increase your score.

Open a card with a balance transfer offer

Card companies occasionally offer promotional balance transfer APRs to encourage people to open new cards. If you carry a balance on a card with a high APR, it can be worthwhile to open a balance transfer card and take advantage of the lower rate.

Don't carry a balance If you don't have a balance on your credit card, you won't pay interest. Not carrying a balance won't lower the APR itself, but it will reduce how much you need to pay.

As with any financial agreement, familiarize yourself with your credit card's terms and conditions, including its APRs. Remember that APR is only applied if you're carrying an outstanding balance on your card. You can typically avoid paying any interest charges if you pay off your card balance before the statement period ends each month.

Selecting the right credit card shouldn't be complicated. Learn about all ourcredit card optionsand how we're ready to help you reach yourmoney goals. Whether you want to earncash back rewardsortransfer a balance, find the card that will fit your lifestyle and needs.