The real cost of credit card debt may surprise cardholders who don't understand how rapidly APR interest charges can pile up when carrying balances month-to-month. That's why grasping the credit card APR is crucial to beating financial goals.

Below, we'll demystify credit card APR and cover a few other credit card essentials, including:

  • What APR means
  • Understanding variable APR versus fixed APR
  • The difference between APR and interest rate
  • How to calculate credit card APR
  • What is a 0% APR offer?
  • How to pay off debt faster
  • How to find a 0% intro APR credit card
Percent symbol sitting among dollar sign symbols.

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What APR means

APR stands for annual percentage rate. A credit card APR is the price you pay to borrow money and it reflects those costs over one year. It's important to note the actual interest costs are compounded daily, not yearly.

For example, borrowing $1,000 at a 10% APR doesn't mean you'd pay just $100 in interest costs. Compounding interest works in the card issuer's favor and will result in you paying more over the life of the loan as interest charges are charged on top of prior interest charges.

Understanding variable APR versus fixed APR

Most credit card APRs are variable, meaning they move in tandem with broader economic interest rates. Variable APRs are determined by adding a pre-determined margin on top of a benchmark rate, such as the U.S. prime rate. As prime rates move up or down, card issuers update their card APRs on a monthly or quarterly basis.

A fixed APR doesn't change with broader interest rates, which may work out in your favor with rising interest rates, but it's rare for credit cards to offer a fixed APR.

The difference between APR and interest rate

The interest rate and APR on a credit card are typically one in the same and both accurately reflect the one year cost of borrowing money.

APR and interest rate are different in the context of a mortgage. Interest rates are generally lower than APRs and are used by some clever marketers as teaser rates to attract new business. But APR is what homeowners should be focused on. APR accounts for the various all-in costs (think origination fees and discounts points) and reflects a mortgage owner's actual payment each month.

How to calculate APR and credit card interest charges

At first glance, the formula used to calculate credit card interest charges may appear complicated. But don't go sprinting for the "back" button on your internet browser. You'll soon fully grasp something many others overlook. That puts you in rare, financial savvy company today.

Broadly speaking, credit card interest is calculated by applying a daily rate to an average daily balance carried on a credit card. The following graphic outlines the full calculation in more detail.

Graphic outlining the formula to calculate credit card interest.

How to calculate credit card APR interest charges.

Now that we have the lay of the land, let's go under the hood and learn how to calculate credit card interest charges in three steps.

1. Convert the APR to a daily rate -- Interest isn't charged once per day, so APR is converted to a daily periodic rate, or DPR, by dividing the APR by either 360 or 365. For a 17% APR divided by 365, the DPR is 0.00465%.

2. Calculate the average daily balance -- Calculating the average daily balance takes a few more steps as shown in the table below. Two payments are made throughout the month on an initial $500 balance, one payment for $250 and one payment for $50. Accordingly, a $500 balance was held for 10 days, $250 balance for 10 days, and $200 for another 10 days. Multiply each balance by the number of days it was carried throughout the month, then divide the total by the number of days, to arrive to an average daily balance of $316.67.

Sample table to help calculate credit card interest charges.

Hypothetical average daily balance example.

3. Calculate the monthly interest charge -- Now that we know the DPR and average daily balance, multiply those numbers together, and then by the number of days in the month (0.00465% x $316.67 x 30) to bring us full circle to a monthly interest charge of $4.42.

What to know about credit card APR

We can glean a few important takeaways now that the you know how to calculate credit card interest charges.

First, payment timing affects interest charges. Payments made earlier in the billing cycle will result in lower interest charges, due to a lower average daily balance held throughout the month.

Second, interest can be avoided entirely by paying off balances before the due date. That can be explained by the fact a $0 average daily balance is subject to interest after the due date.

What is a 0% APR?

Credit cards can be powerful tools to help cardholders get out of debt or to defray the costs for large, new purchases. There are essentially two types of 0% intro APRs.

1. 0% intro APR on new purchases -- Some credit cards will offer a 0% APR for new purchases. But know that this APR is a promotional rate and only applies during a specified period, which can range from a few months all the way up to 21 months for some credit cards. This is a valuable tool to help cardholders avoid interest charges on a large purchase that is paid for over time.

2. 0% intro APR on balance transfers -- These cards are better known as balance-transfer credit cards, which can help indebted cardholders chip away at debt balances faster by transferring high-interest cost balances to a 0% intro APR credit card, where the promo period similarly can last up to 21 months.

How to pay off credit card debt faster

Avoiding credit card debt can help people better reach their financial goals and getting out of credit card debt faster can help them to invest in their futures sooner. Transferring balances to a 0% intro APR balance-transfer credit card can secure cardholders some reprieve from interest charges during the promotional period. For example, paying down a $5,000 balance over 18 months will cost $703 in interest charges at an 18% APR and these charges can be avoided entirely with a balance-transfer credit card, when paying off the same balance over an 18-month promotional period.

How to find a 0% intro APR credit card

Cardholders searching for a good 0% intro APR offer should first nail down their credit priorities. Taking advantage of a 0% intro APR for new purchases doesn't make much financial sense when paying off debt faster is the primary goal. Figuring out which APR offer type fits your needs will better set you up for success.

Once figuring out your needs, review our picks of the best 0% intro APR credit cards and best balance-transfer credit cards. We've vetted some of the most popular offers on the market and selected a handful of credit cards that fit what we like to see in a 0% intro APR credit card, namely, no annual fee, flexibility, and transparency.