Published in: Credit Cards | Oct. 31, 2018

What Does APR Mean on a Credit Card?

The lower the number is, the better. Here's why.

A blue sign that reads zero percent APR this month only.

Image Credit: Getty Images

Whenever you borrow money, it's essential to know the interest rate that you have to pay. For credit card debt, the interest rate is reflected in what's known as the APR, or annual percentage rate. In order to calculate exactly what you'll have to pay in interest charges if you carry a balance from month to month, credit card companies take the APR and apply it to the amount of outstanding debt you have. The higher the APR is, the more you'll pay in interest -- and the harder it'll be for you to get out of credit card debt.

What is your APR?

There's no one set annual percentage rate that applies to all credit card debt. In general, the better your credit score is, the lower your APR will be on the cards that card companies offer to you. As a result, APRs can vary greatly, ranging anywhere from 0% APR all the way up to 20% or more.

In some cases, your credit card company might charge you different APRs depending on how you use your card. For instance, purchases you make might have one APR, but you might pay a different APR on cash advances that you take using your card, and a third rate might apply if you use balance transfers.

How to calculate interest using APR

In order to see how APRs work in real life, it's useful to take an example. Say you have a credit card with a fairly typical APR of 14.99%. You make a purchase of $1,000. How much in interest will you owe?

The APR is an annual rate, so the first step you have to do is to translate that into a daily rate. When you take 14.99% and divide it by 365 days in a year, you get a daily interest rate of about 0.04107%. On an outstanding balance of $1,000, that works out to $0.41 per day.

One thing to keep in mind is that if you haven't historically carried an outstanding balance on your credit card, you'll typically have a grace period to pay off your debt without having to pay interest. So if you charged $1,000 in purchases and then paid off the full $1,000 balance by the due date in your next statement, you'd pay no finance charges.

However, if you don't pay off your balance in full, then the interest gets charged retroactively to the purchase date. So for instance, if you made the purchase 15 days before the closing date of your statement and didn't pay off your full card balance, you'd owe $0.41 per day multiplied by 15 days, or $6.15 in interest. Moreover, the clock would still be running during the next statement period, so your total interest could be even higher.

Why APRs can make credit card interest confusing

Even though the APR concept is pretty simple, it can be hard to apply in practice. That's due to a number of factors, including:

  • Most people make multiple purchases throughout the month, so their daily balances change dramatically over the course of a statement period.
  • Card companies often have interest rates that are variable and can therefore change when a certain benchmark interest rate, like the prime rate, goes up or down. That then makes it necessary to look at exactly when APR changes take effect to come up with the right amount.
  • Special offers can introduce multiple APRs. For instance, some card companies offer a lower rate on purchases to encourage greater use of cards when shopping, while keeping cash advance rates much higher.


In the end, though, the APR is always directly related to the amount of interest you pay.

Get your APR down

Because the APR defines the size of your finance charges, the best strategy is to find the best credit cards with a low APR. If you have a high APR, negotiate with your credit card company to get it reduced. Especially if you have a history of making payments on time, your credit card company should be willing to work with you to avoid having you switch to a competitor's lower-rate card.

Even better is not to carry a balance on your credit card at all. Then, APRs no longer have an impact because you'll be able to use your card's grace period to avoid interest charges entirely.

In either case, you're always best off negotiating as low an APR as you can. Even if you don't intend to carry a balance now, a change in circumstances can always put you in a situation in which you need to change the way you use your cards -- and a low APR will make it as inexpensive as possible to get access to your credit.

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