What is APR on a Credit Card and How Does it Work?
When you use a credit card, you are borrowing money from the credit card issuer. If you don’t pay back the borrowed amount in full by the end of the billing cycle, you’ll incur interest charges on the remaining balance. This is where APR comes into play.
Hence, APR is one of the first things to check when selecting a credit card provider. What is APR for credit cards? Are there many types of APR for a credit card? Understanding this metric and how it’s calculated will help you select the best card tailored to your needs. So, here’s everything you need to know about how APR works and how it differs from the usual interest rate.
Understanding APR for Credit Cards: What It Is and How Does It Work?
Before answering the question ‘How does APR work on a credit card?’ we should clarify that the term ‘interest rate’ defines the fee amount you pay for borrowing money from a provider. What’s the catch? Let’s see.
APR for a credit card: What Is It
APR is the annual percentage rate that includes the total price you pay for borrowing costs from your credit vendor yearly. The APR for a credit card unites all annual charges under one dome, meaning the provider’s interest rates and other standard fees.
What is APR for a credit card, and why is it important?
Knowing about APRs allows you to quickly compare credit cards and conditions, calculate how much it will cost you to use one on a daily and monthly basis, and identify whether your APR will be based on the prime rate or not. You’ll also be able to avoid tricky pitfalls like overspending on interest or missing fees included in the APR.
How does APR work for credit cards?
What does APR mean on a credit card in practice? Each time you borrow money, you might carry a balance subject to this percentage rate added to the amount you owe from month to month. If you don’t pay it off in full according to your credit schedule, you’ll be paying it back with APR.
When wondering, ‘What is APR on a credit card?’, remember that every balance has its own interest rate. And if you carry an additional unpaid balance from previous months, the new loan’s percentage rate will be added to it.
Types of APR Explained
Another thing to keep in mind is that APR differs depending on the type of card you hold and the credit you apply for. So, your vendor might offer several APRs. Generally, it’s all about whether the annual percentage rate applied to every transaction is fixed or variable.
Let’s take a closer look at this difference.
Fixed APR
Your APR remains fixed and isn’t supposed to skyrocket or drop following the drastic changes in the prime rate. This means you can easily plan your purchases and credit payments. However, nothing stays forever, so remember that this APR stays fixed only for a time period. If you miss your payment calendar or violate your credit card agreement somehow, expect your APR to increase. Your card issuer can also raise a fixed rate at its own discretion, providing you with a simple notice.
Variable APR
In this case, you clearly understand from the start that your APR will vary in sync with all sudden movements of any underlying index rate. The calculation is transparent, too. The new rate will be an index plus some market margin/percentage. However, even though the variable APR is unpredictable, it may enable you to pay less than expected.
Besides those two main ones, there are also other types of annual percentage rates you should consider:
1. Purchase APR
Applies to all your credit card purchases—online, in-store, or via phone.
2. Balance Transfer APR
Your provider will charge it when you transfer your balance from one credit account to another. If you move it to a new card, check an introductory rate-free period to avoid missing the deadlines.
3. Cash advance APR
This applies when you borrow actual cash, buy lottery tickets or casino chips, and exchange currencies. Credit firms favor charging a higher percentage rate for cash advances due to the lack of a grace period. The interest steps into play immediately after you withdraw money.
4. Introductory/Promotional APR
Available for new card users, but only for specific transactions and a limited time (from 6 to 18 months). It might be lower than a standard APR on your account or even down to 0%. You must pay your account’s regular APR when the introductory period ends.
5. Penalty APR
This applies to your balance when you miss payment deadlines or violate the card agreement terms. Providers can have different conditions you’ll have to follow to remove a penalty rate. To avoid these charges, try to repay the balance or at least the minimum required amount at the end of your billing cycle.
3 Crucial Factors that Affect Your Credit Card APR
Besides knowing how APR works on credit cards, you should keep in mind a few factors that influence it:
1. Credit history
Make sure you maintain a positive credit history and pay off your balances on time. Authorized companies will use your credit reports to calculate credit scores. Spoiler alert: It also affects the APR!
2. Credit scores
A good credit score results in better creditworthiness for you. It showcases your credit history and financial habits. The higher your score is, the better. This will usually get you a lower APR offer.
3. Card type
Different vendors offer different types of credit cards with varying APR. Rewards credit cards, for instance, typically have the highest interest rates, so carrying a balance on such cards will be expensive.
Final Thoughts
How does credit card APR work? Now you know the answer and why it’s important to understand all the tips and tricks for the annual percentage rate. Navigating its types and limitations is essential to avoid overpaying for your purchases or credit cash withdrawals. Moreover, knowing what the credit card APR is can help you choose the best credit card provider that will meet all your needs without leaving you broke.
Key takeaways:
- APR is the total price of borrowing that includes yearly credit card interest rates and other standard fees.
- A good APR for a credit card typically ranges between 17% and 20%.
- When selecting a card issuer, check whether you’ll get a variable or fixed APR.
