One piece of advice you might hear when you tell people you’re looking for a credit card is “Look for a card with a low APR.” While that might be good guidance, it doesn’t necessarily help explain what an APR is and why it matters. (APR actually stands for annual percentage rate.)

What Does APR Mean, Anyway?

Here’s how the Federal Trade Commission defines it:

“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.”

That’s a lot to unpack, so let’s break it down. “Cost of credit” means, “the price you pay for borrowing money,” according to the Consumer Financial Protection Bureau. It’s basically how much the company or bank issuing your credit card can charge you for different ways of using your card. Experian gives five examples of APR: Introductory, Balance Transfer, Purchase, Cash Advance and Penalty.

What is 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 usually applies just to purchases. No (or zero) APR means that if you pay just the minimum payment between billing cycles — you won’t have to pay interest on the balance you carry.

What is a Balance Transfer?

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 over to another credit card. There are a number reasons why you might want to do this: for example, maybe one of your credit cards has a lower interest rate. Then, 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 swap is not free. Also, sometimes the low rates that enticed you to make a balance transfer may expire in six months or a year, so keep an eye out for that too.

What Is Purchase and How Is It Different Than APR?

Purchase is what most people think of when they refer to APR. It’s the rate to which the introductory APR moves after the introductory period is over and it applies to purchases you make with the card. It can also be totally avoidable by paying your bill in full every month, because it only affects the unpaid balance. It can be higher or lower according to your “creditworthiness” — a.k.a., how the card issuer judges your credit history, according to The Balance.

What Is a Cash Advance? Why Does It Have an APR?

A cash advance is when you use your credit card to take out cash. This can be tempting – you might be able to take out more in cash than you would with your ATM card, which is limited by your bank balance – but it can also be financially risky. 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 this is a flat fee and sometimes it’s a percentage of the amount you borrow — usually the larger of the two options. The cash advance APR can also be separate and higher than the purchase APR. Maybe you don’t ever plan on using your credit card as an emergency ATM. Still, as a responsible credit card user, you should read the agreement and know all the fees.

What Is a Penalty APR?

Penalty APR is a charge for missing payments by at least 60 days (two monthly billing cycles). That penalty can be as high as 30 percent and may, according to The Balance, never expire. If you’re in a real bind and can only make the minimum payments, you’ll be carrying a balance subject to the purchase APR. But as long as you’re making those payments, you won’t incur penalties. A nice perk of the Discover it® Cash Back card? Late payments won’t raise your purchase APR.

College Student Quick Answers: What is an APR?

Quick, without looking it up: What does APR stand for? What’s its purpose? We asked four students the same questions, and their answers may surprise you.

Final Thoughts

An APR isn’t “how much interest your credit card builds up every year,” nor is it “the interest applied to your outstanding balances” — well, not exactly. It’s a set of interest rates the card issuer can charge for different ways you use your card. It’s calculated based on the prime rate and your creditworthiness. If you have just one card, pay your bill in full every month and don’t get cash advances, you won’t have anything to pay interest on, making your APR less of a concern.

Originally published June 22, 2015.

Update October 18, 2019.


Legal Disclaimer: This site is for educational purposes and is not a substitute for professional advice. The material on this site is not intended to provide legal, investment, or financial advice and does not indicate the availability of any Discover product or service. It does not guarantee that Discover offers or endorses a product or service. For specific advice about your unique circumstances, you may wish to consult a qualified professional.