Credit cards
What is APR?
Definition snippet
APR, or annual percentage rate, is the yearly cost of borrowing money, expressed as a percentage. On a credit card, APR is the interest rate you pay on any balance you carry past your due date. The average credit card APR has recently run above 20%, so avoiding interest is one of the most valuable things you can do with a rewards card.
Key takeaways
- APR is the yearly interest rate on a credit card balance, and you owe it only when you carry a balance past your due date.
- Most cards carry several APRs, including purchase, introductory, balance transfer, cash advance and penalty rates.
- The average credit card APR has recently run above 20%, so a rate below that is a good one.
- Interest can erase your rewards quickly: $100 carried for a month at 20% APR costs almost $2, more than the 1.5% cash back earns on it.
- Rule of thumb: pay your full statement balance by the due date every month.
How does APR work on a credit card?
Card issuers convert your APR into a daily rate by dividing it by 365. Each day, the issuer multiplies that rate by your balance (depending on your card agreement, your current or average daily balance) and adds the result to what you owe. Because interest is added to your balance, it compounds: you start paying interest on interest.
The grace period is how you sidestep interest entirely. Under the Credit CARD Act of 2009, your issuer must give you at least 21 days between your statement and your due date. Pay your full statement balance by then, and you generally will not owe interest on new purchases, as long as you were not carrying a balance from the month before.
What are the different types of APR?
One card can carry several APRs at once, each tied to a different kind of transaction.
| Type | Applies to | What to know |
|---|---|---|
| Purchase APR | Everyday purchases | The standard rate. It applies whenever no other APR takes priority. |
| Introductory APR | New purchases, balance transfers or both, for a limited time | Sometimes 0%. Reverts to the regular APR when the offer ends. |
| Balance transfer APR | Debt moved from another card | Often 0% for an introductory period. Most cards charge a transfer fee. |
| Cash advance APR | Cash borrowed against your card | Typically higher than the purchase APR, with no grace period. |
| Penalty APR | Missed or returned payments | Can reach 29.99% or more. It can take several on-time payments to remove. |
Rates are also either fixed or variable. A fixed APR stays the same over time, while a variable APR moves with the prime rate, the benchmark banks use to set interest rates. Variable APRs are common, so your rate can rise or fall as the prime rate moves.
What is a good APR, and how can you avoid paying it?
A good APR is one below the average. Federal Reserve data shows the average credit card APR running above 20% recently. Low-APR cards typically require a good credit score, around 690 or higher, and tend to offer fewer perks than premium rewards cards.
The best APR is the one you never pay. These strategies keep interest off your statement:
- Pay your full statement balance by the due date every month.
- Put a large, planned purchase on a card with a 0% intro APR, and pay it off before the offer ends.
- Move high-interest debt to a 0% balance transfer card. Most charge a transfer fee, but it is usually far lower than the interest you would otherwise pay.
- If you do carry a balance, pay more than once a month. Interest accrues daily, so earlier payments reduce what you owe.
Frequently asked questions about APR
What does APR stand for?
APR stands for annual percentage rate. It is the yearly cost of borrowing money, expressed as a percentage. On a credit card, you pay it only if you carry a balance past your due date.Is APR the same as an interest rate?
On a credit card, yes. For installment loans such as auto or personal loans, APR also includes the lender's fees. Credit card APR covers interest only and does not include annual fees.What is a good credit card APR?
A good APR is one below the national average, which has recently run above 20%. Rates under that are tougher to get and typically require good credit. A 0% intro APR can be even better for a large purchase, as long as you pay it off before the offer ends.How is credit card interest calculated from APR?
Your issuer divides your APR by 365 to get a daily rate, multiplies it by your balance each day and adds the result to what you owe.How do you avoid paying APR on a credit card?
Pay your full statement balance by the due date. Your issuer must give you at least 21 days between the statement and the due date, and paying in full during that window generally means no interest on purchases. A 0% intro APR card can also give you interest-free time on a big purchase.
