One piece of advice that gets tossed around a lot when it comes to credit cards: Look for a low annual percentage rate (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 the company or bank issuing your credit card can charge you for borrowing money in different ways. There are typically five ways you can use your credit card and your APR may adjust slightly for each. They include:

  1. Introductory APR
  2. Balance Transfer APR
  3. Standard Purchase APR
  4. Cash Advance APR
  5. Penalty APR

1. 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.

2. 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 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 move 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 make sure you’re aware of the expiration date of that lower APR.

3. Standard Purchase APR

The cost of purchases is what many 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 or on balance transfers and cash advances, beginning on the transaction date. It can be higher or lower according to your “creditworthiness” — a.k.a., how the card issuer judges your credit history.

4. Cash Advance 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.

5. Penalty APR

A 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 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 and on time, your card issuer will not impose a penalty APR. Remember, APRs are a set of interest rates the credit card issuer can charge for different ways you use your card. It can be calculated based on the prime rate and your creditworthiness. If you have just one card, pay your bill in full every month and on time; don’t get cash advances or take balance transfers; and your card offers a grace period, your card issuer probably won’t charge interest on your purchases, making your APR less of a concern.

Published June 22, 2015

Updated January 11, 2021

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