What is an APR?

You may have heard that you should look for a credit card with a low APR. It’s good advice, but what does it actually mean? 

According to the Federal Trade Commission, “The APR is a measure of the cost of credit, expressed as a yearly interest rate. It must be disclosed before your account can be activated, and it must appear on your account statements. The card issuer also must disclose the ‘periodic rate’ — the rate applied to your outstanding balance to figure the finance charge for each billing period.” 

Translation: An APR is how much your credit card issuer charges you for borrowing money. 

What does APR stand for?

APR stands for “annual percentage rate.” Your credit card may not have just one annual percentage rate for interest, but the APR may vary based on how you’re using your card.

How credit card APRs work

APRs are a set of interest rates the credit card issuer can charge for different ways you use your card. The different types of APRs include:

Introductory APR

Introductory APR is the rate put into place when you’re first offered a credit card. It’s often very low — sometimes 0 percent — and expires after a short amount of time, possibly between the first six and 24 months you have the card. It often applies only to purchases. Zero percent APR on purchases means that if you pay at least the minimum payment due each month— you won’t have to pay interest on your purchases balance you carry during that introductory period.

Balance transfer APR

The clue’s in the name. A balance transfer is when you take debt you’ve built up (perhaps it’s debt on a credit card or a car loan) and transfer it to a new credit card. If your new credit card has a lower interest rate, it may make sense to transfer the balance from a higher-rate card. However, it’s important to keep in mind that balance transfers also often come with balance transfer fees, so the move is not free. Also, the low intro APR that enticed you to make a balance transfer will eventually expire, and then the standard APR will apply to the remaining balance. You want to pay off the balance transfer as soon as you can so you don’t accrue more interest.

Standard purchase APR

The cost of purchases is what many people think of when they refer to APR. It’s the interest rate your card will have when the introductory APR ends.

Cash advance APR

A cash advance is when you use your credit card to take out cash. Unlike taking money out with an ATM card, a cash advance isn’t your money; it’s a loan, one that you’ll need to pay interest on, as well as fees. Sometimes there’s a flat fee and sometimes it’s a percentage of the amount you borrow. The cash advance APR can be higher than the standard purchase APR.

Penalty APR

A penalty APR may apply to your account if you don’t make the required payments on time.. That penalty APR can be as high as 30 percent. Check your cardmember agreement to see how it will apply to your account. If you’re in a real bind and can only make the minimum payments, you’ll be carrying a balance subject to the standard purchase APR. But as long as you’re making those payments and on time, your card issuer will not impose a penalty APR. APRs can be calculated based on the prime rate and your creditworthiness. If you have just one card, pay your bill in full and on time every month; don’t get cash advances or take balance transfers; and if your card offers a grace period, your card issuer probably won’t charge interest on your purchases, making your APR less of a concern.

Can my APR change after I get my credit card?

If your credit card came with an intro APR, the APR will rise when the introductory period expires. Your card issuer may also raise your APR if your credit score goes down, because a lower credit score makes you riskier to lend to. 

Federal law requires credit card issuers to give notice before changing your APR, so you will normally have 45 days to agree with the new rate or cancel your card. Your credit card may also have a variable APR that is adjusted based on the prime rate, but this type of change doesn’t require advance notice since it is already in your cardmember agreement. 

What is a good APR for a credit card?

Credit card issuers may consider your credit score in determining your APR, so different applicants may be offered different APRs.  The average APR fluctuates with the economy, so the best way to find a good APR is to compare the APR ranges in the current terms of any cards you’re considering. 

The best APR is 0, because that means no interest is applied to the applicable balance. While you won’t find a credit card that offers 0% APR indefinitely, it’s possible to find a 0% intro APR, and you can check the length of the introductory period to find out how long you’ll be able to enjoy a 0% APR. Keep in mind that if you don’t pay the balance in full by the end of the intro period, you’ll owe the standard APR on your outstanding balance. 

How will my APR affect my credit card payments?

The lower your APR, the less interest you’ll pay on an outstanding balance. The Discover credit card interest calculator shows you the effect of changing your interest rate. You can calculate your balance using different APRs to find out how long it will take to pay off your credit card at your current rate vs. a lower rate. 

How to get a better credit card APR

Since people with high credit scores get the best APRs, raising your score may qualify you for a better APR. You can request a free credit report at annualcreditreport.com, and check which factors are affecting your score. If your score is low due to missed or late payments, making sure to pay on time each month will eventually raise your score and qualify you for a better APR. 

Does a good credit card APR always matter?

If you pay off your credit card statement balance in full and on time each month, you won’t incur any interest on purchases as long as you have a grace period on your account. You can minimize the impact of APRs on your account—even if they are high—by paying the statement balance off each month, and not taking cash advances or balance transfers.