The terms “APR” and “interest” tend to be used interchangeably, but they’re actually quite different — and it’s important to understand that difference.

Interest is a fairly straightforward concept, reflecting the annual cost of borrowing the principal balance on a loan.

APR, which stands for annual percentage rate, is a little trickier. It often includes fees charged in connection with the loan and is designed to reflect the total cost of the loan over time. With respect to credit cards, which operate as short-term loans, it’s used to calculate the interest that accumulates daily.

When applying for credit cards, you might see advertisements that mention APR. Compared to the interest rate, which describes the cost of borrowing money (calculated as a percentage of the amount borrowed that the borrower is responsible for repaying, in addition to the principle), the APR is a broader measurement that represents the “real” annual cost of borrowing money.

On installment loans, like car loans and mortgages, the difference between interest and APR is important, according to Experian, because the APR includes not just interest, but also fees and other charges that can significantly impact the total amount the consumer will be required to pay back.

Confused? That’s OK because it’s a complicated topic. Here’s the good news, though: according to NerdWallet, when it comes to credit cards, the interest rate and APR are the same, thanks to the federal Truth in Lending Act (the law governing all consumer lending contracts), which requires your bank or credit card company to state their interest rates as APRs. So, when it comes to credit cards specifically, know that APR and interest rate are exactly the same thing (while remembering that when it comes to other types of loans, they often are not the same).

Interest rate vs APR

How Do Credit Card Interest Rates Work?

In the simplest terms, an interest rate is like the price tag for borrowing money. For credit cards, this is expressed as a yearly rate, aka the APR. Here’s how it works: If you have a balance of $2,000 and an APR of 20 percent, then the interest you hold that year is $400. You pay that $400 divided over 12 months, resulting in a monthly interest payment of approximately $33.

It can be important to keep in mind that different interest rates can apply to a cash advance balance and balance transfer balances. Additionally, credit card variable interest rates can change with the Prime Rate, which is an interest rate banks often use for credit card loans.

Is There More Than One APR?

Different lenders have different ways of calculating APR and, if you read the disclosure statements that come with a credit card, you may find several different APRs that are applied to different kinds of transactions, such as balance transfers. Be aware that there’s almost always a higher APR for cash advances than purchases. Also know that many credit cards begin with an introductory APR that changes to a higher APR after the introductory period ends.

What Should I Watch Out For?

A lot of math goes into calculating APR, but the key thing to know is that APR is a more complete disclosure of the actual cost of credit.

  • If you want to know the true cost of a loan over time, compare the APR on each credit agreement.
  • If you want to know which loan will have the lowest monthly payment, comparing interest rates is one component to consider.

The APR you will pay is almost always higher than the interest rate because it represents the total cost of the loan. So, you should always look at APR when comparing credit cards, car loans or mortgages because that will give you a clearer picture of the actual price tag.

Who Regulates APR Disclosure?

The Truth in Lending Act of 1968, now enforced by the Consumer Financial Protection Bureau, sets forth requirements for the calculation and disclosure of APRs to make comparisons easier for consumers — all lenders have to provide it.

The idea behind the APR disclosure is to level a complex playing field where the elements of different kinds of loans and credit agreements can vary in many key areas, including transaction fees and interest rate structures. APR makes for even and accurate comparisons.

How Can I Get a Lower APR?

The APR you are charged is a reflection of your credit terms, and your credit terms depend on your credit history, your credit score and other factors. Typically, the lower your credit score, the higher your APR. However, over time, if you build a favorable credit history, you may get a lower APR.

Is There Anything Else I Should Know About APR?

With credit cards, APR typically applies to unpaid balances. This is why financial experts say you should always pay the statement balance that’s due at the end of each billing cycle — even if you always have the option of paying the minimum balance due. There is a stretch of time, known as the “grace period,” that runs from the end of a billing period and the date your minimum payment is due. During this time, you can pay your credit card bill without paying interest on new purchases. However, if you pay just the minimum balance due, or a partial payment that exceeds the minimum payment but is less than the entire balance, interest will be charged. Interest may also be charged when cash advances or balance transfers post to your account. See your cardmember agreement for specifics.

Carrying over a balance from month to month can become expensive. If you want to know just how expensive, understand your APR.


Originally published January 25, 2017

Updated August 7, 2019

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