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What Is APR on a Credit Card?

What Is APR on a Credit Card?
Sheryl Nance-Nash

Sheryl Nance-Nash

Updated November 30, 2021
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When you’re on the hunt for a credit card, few things are as important as the interest rate you will be charged. Called your APR, this determines how much you will have to pay for the money you borrow.Read on to learn more about what APR means for a credit card as well as the different types of APR that exist and the typical rate you’ll pay.

What Is APR?

APR stands for annual percentage rate. It is an annualized representation of your interest rate, or how much interest is charged when you carry a balance on your credit card.This number can be helpful when you’re trying to choose which credit card to apply for. If there was a card with an APR of 13% and another with an APR of 18%, the second card’s higher APR would likely be a deal breaker and, all other things being equal, you would go for the lower rate card. But it also matters how the APR is applied and how it’s calculated.

How Does APR Work?

Every credit card issuer has its own practices, but typically you can expect a grace period, often around 25 days, for new purchases before your APR applies. If you only make purchases and pay off your ending balance each month by the due date, you pay only the amount you owe with no interest. This is the ideal when it comes to how to use credit cards and avoid debt.However, if you can’t pay the bill in full when it arrives, you pay the agreed-upon interest on your outstanding balance. Your APR will depend on your creditworthiness as well as the U.S. prime rate, which banks use to help set rates on consumer lending products. You can generally find the APR on a credit card you have by reading your credit card statement.

Typical Credit Card APR

According to the credit reporting agency Experian, the average APR for credit cards has been around 14% to 15% since 2018. However, rates can also range much higher than that depending on the type of card and the applicant’s creditworthiness, reaching to a maximum APR of 24% or higher.Rewards cards, for instance, tend to have interest rates on the higher side. According to data from ValuePenguin, the average APR for rewards cards hovers around 19.10%. Airline cards have an even higher average APR at 20.13%.

Fixed APR vs Variable APR

APRs come in two flavors, fixed or variable. Fixed rates aren’t all that common — typically a card’s APR is variable. Knowing the difference is important.

What Is Fixed APR?

Simply put, a fixed APR stays the same. It’s not tied to an index. However, this doesn’t necessarily mean the rate will never change. The difference is that the issuer will likely need to contact you before raising the rate, at which point you can decide to dump the card if the rate is too high.

What Is Variable APR?

Variable rates are the norm with credit cards. With a variable APR, the card’s interest rate can change over time based on an index interest rate, such as the prime rate. When the prime rate changes, it can directly impact the variable rate on credit cards.Pros and Cons of Fixed APR vs Variable APR

Different Types of APR

Just when you’re getting familiar with the difference between a variable and fixed APR, there’s more to learn. Here are the different types of APR you may encounter.

Purchase APR

One type of APR is a purchase APR, which is applied to all purchases you make with your credit card. This is the most common type of interest rate for credit cards.

Balance Transfer APR

Then there’s an APR for a balance transfer, another credit card term with which to familiarize yourself. When you move or transfer a balance from another card onto your credit card, a balance transfer APR applies. You want to be sure you know what the rate is because it’s possible the balance transfer APR is greater than a card’s purchase APR. Inquire before you make a balance transfer.

Penalty APR

If you’re delinquent, meaning you don’t pay the minimum amount due on your credit card for more than 60 days, you may trigger a penalty APR. This APR may be a stiff increase — certainly more than the regular purchase APR — reaching as high as 30%. However, because all credit cards operate a bit differently, your issuer may not have a penalty APR. Read the fine print in your credit card’s terms and conditions to find out.

Cash Advance APR

A cash advance APR applies if you need to use your credit card to borrow cash. While cash advance APR may not be as stratospheric as the penalty APR, it’s bound to be more than your purchase and balance transfer APR. To make matters worse, cash advances often don’t have a grace period, meaning the interest clock starts ticking the day you take out a cash advance.

Risks of High APR

A credit card with a high APR can lead to trouble. When you pay your balance in full each month, the interest rate doesn’t mean much because you don’t incur it. But when you carry a balance with a high interest rate, you can pretty quickly find yourself with more debt than is healthy.A high APR effectively increases the price of your purchases. If you bought something for $500 with a high-interest card and incurred interest because you didn’t pay the balance in full, that purchase can end up costing quite a bit more than $500.

What to Expect From High APR Cards

A card with a high APR is not your friend. If you are going to use the card, vow to pay your balance in full each month. Carrying a balance on a high-rate card can be a trap if it keeps growing and growing.Some credit cards with a high APR are rewards cards that can offer perks like cash back or airline miles. These cards aren’t bad — in fact, they can be among the top credit cards now — but you’ll still want to make sure you’re paying off the balance in full so the APR doesn’t cancel out your perks.Additionally, you may have a high APR because your credit is less than stellar. In that case, you might use the card for improving your credit score through on-time payments and moderate utilization, and then move onto a card with a better APR.

Advantages and Disadvantages of Low APR Cards

With the drawbacks of high APR cards, a low APR card has to be the way to go, right? Not so fast. Low APR cards certainly have advantages, but they also have disadvantages to consider as well.

Pros of Low APR Cards

Here are the upsides of low APR cards:
  • If you can’t pay off your balance in full each month, a low-rate credit card won’t lead you to rack up as much in interest.
  • A low-rate card spares you the ritual of chasing zero-interest cards and other promotional offers that expire, leaving with whatever is the going rate.

Cons of Low APR Cards

As we mentioned, there are downsides to consider as well, including:
  • Some low-rate credit cards charge fees if you transfer balances or use them abroad, which can add costs. 
  • A low-rate credit card may not offer rewards and perks like other cards. 
  • Even though the interest rate is low, it’s still adding to the cost of your purchase.

Tips to Avoid Paying Interest

The best way to avoid paying interest is to pay your bill in full each month. If you can’t, vow to pay off the interest in the shortest amount of time possible, even if it means making tough choices. For instance, you may commit to a no spend month and use the money you would have spent on extras like dinner out or clothes to put toward eliminating your balance. It might feel like a sacrifice in the short-term, but it will save you from interest continuing to rack up on an unpaid balance.

The Takeaway

Understanding credit card APR and how it works is key to managing your credit. Ideally, you’d pay your balance in full each month and so interest rate has little importance, but because life is life, anyone can find themselves carrying a balance from time to time.While APR is an important aspect of choosing a credit card, there are many considerations to make and numerous options to choose from. Luckily, Lantern makes comparing APRs and other aspects of credit cards easy so you can make the right choice for your financial situation.
Photo credit: iStock/DGLimages
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1021255

About the Author

Sheryl Nance-Nash

Sheryl Nance-Nash

Sheryl Nance-Nash is a freelance writer specializing in personal finance, business, and travel. Her work has appeared in Money Magazine, Newsday, The New York Times, Business Insider, BBC.com, AARP the Magazine, ABCNews.com, Forbes.com, among others.
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