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What is APR on a credit card? 

Jan. 31, 2023
7 min read
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Editor's Note

This is a recurring post, regularly updated with new information.

As a credit cardholder, you’ve likely come across the term APR — or “annual percentage rate” — many times in the past. However, even if you have a rough idea of what the term APR means from your credit card statements or new credit card offers, it’s normal to still have questions about it.

The guide below helps to demystify credit card APRs and how they work. Read on to discover what the term “APR” really means, how credit card companies calculate the interest charges on your account and how you can avoid paying interest charges where your credit card is concerned.

What is APR on a credit card?

APR is an abbreviation of the term annual percentage rate. It represents the annual cost you pay to borrow money from a lender or credit card issuer.

With installment loans, like personal loans or auto loans, APR includes both the interest and fees that a lender may charge. However, credit card APR does not include annual fees. In the case of credit cards, APR just stands for the interest rate.

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What are the different types of APR?

The most common type of credit card APR is called:

  • Purchase APR: The interest rate applied to purchases made with your card. This rate can be fixed or variable, meaning an APR that's static over time (fixed) or one that can change over time according to the prime rate, a metric that banks use to determine overall interest rates.

There are a few other types of APR you might come across, too:

  • Introductory APR: This is a promotional interest rate offered for a limited period of time on a new card, sometimes as low as 0%. It can apply to purchases, balance transfers or both. Once the introductory offer expires, the card reverts to a regular APR.
  • Cash advance APR: This is the rate for borrowing cash from your credit card, typically higher than your purchase APR, with no grace period. It’s also often applied to convenience checks.
  • Penalty APR: This APR applies to missed or returned payments, reaching as high as 29.99%. You might have to make several on-time payments in a row before your credit card issuer removes the penalty APR. Avoid this at all costs.

What is a good APR?

The answer, as you might guess, is subjective. According to the Federal Reserve, the average credit card APR tends to hover between 14% and 18% but topped 20% towards the end of 2022. So, if you can find an APR that’s below average, you might consider it to be good.

Our best 0% interest credit cards guide is a great place to start your research on current low-APR credit card options.

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How to calculate APR on a credit card

Before you can understand how credit card companies calculate APR, it’s important to become familiar with a few additional terms:

Daily interest rate

One of the most common ways to calculate APR on a credit card is for a card issuer to divide your annual percentage rate by 365. This figure is called your daily rate or daily interest rate.

Compounding interest

Depending on the terms of your credit card agreement, a card issuer may take your daily rate and multiply it by your current balance or your average daily balance. The result is added to your overall balance, increasing the amount you owe. This process is called daily compounding interest.

Average daily balance

To calculate your average daily balance, write down your credit card balance at the end of each day in your billing cycle. Then average those numbers together. (In other words, add the numbers then divide the sum by the number of days in the billing cycle.)

Depending on your credit card agreement, you may be able to use the following formula (perhaps with some tweaks) to calculate the credit card interest you’ll pay in a billing cycle:

Daily interest rate x average daily balance x number of days in billing cycle = credit card interest.

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Here’s an example to illustrate how credit card APR works:

  1. Calculate daily interest: Suppose your credit card APR is 18.25%. Your daily rate would be 0.05% in this scenario (18.25% ÷ 365 days = 0.05%).
  2. Figure out your average daily balance: We’ll assume that your average daily balance is $1,000.
  3. Look up the number of days in your billing cycle: We’ll assume a 30-day billing cycle for this example. This number can vary from one card issuer to another.
  4. Calculate: Using the hypothetical numbers above, a daily interest rate of 0.05% (0.0005) multiplied by an average daily balance of $1,000 multiplied by a 30-day billing cycle equals $15 in interest charges.

How to avoid paying interest on credit cards

It’s always nice to lock in the lowest interest rate possible when you’re borrowing money. But with credit card APR, it might not be as relevant as it is with other types of credit — provided you can follow an essential rule.

Here it is: You should aim to pay your full statement balance off by the due date every billing cycle. This rule also happens to be one of The Points Guy’s 10 commandments of credit card rewards.

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When your credit card issuer sends you a copy of your credit card statement, you will have a grace period between your statement closing date and the due date on your account. Per the Credit Card Accountability Responsibility and Disclosure Act of 2009, this grace period must last at least 21 days. As long as you pay off your balance during this grace period, i.e. by the due date, you should be able to avoid paying interest charges on your credit card account.

You could also opt to pay your credit card balance off early — before the statement closing date on your account. This strategy might help you lower the credit card utilization rate on your credit report and perhaps even improve your credit score as a result.

However, if you’re not in the habit of paying off your credit card balance every month, the credit card APR matters greatly. In this scenario, you should pay close attention to your credit card’s APR. The interest charges on credit cards have the ability to add up quickly due to notoriously high interest rates compared with other types of financing and compounding interest.

Bottom line

Credit cards can come with many attractive perks, especially attractive rewards credit cards that can give you the potential to earn points, miles, cash back and more.

Yet it’s important to understand how credit card APR works and the steps you need to take to avoid unnecessary costs. Otherwise, high interest charges can offset the benefits you might receive where credit cards are concerned.

Make sure you have a solid strategy in place to track your credit card spending and hopefully avoid interest charges in the first place. And if you are struggling with any credit card debt, create a plan to pay it down as fast as possible to avoid wasting money on interest.

Related: The best 0% interest credit cards

Featured image by NATEE MEEPIAN/EYEEM/GETTY IMAGES
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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Best for the well-traveled foodie
TPG Editor‘s Rating
Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
4 / 5
Go to review

Rewards Rate

4XEarn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S.
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  • Annual Fee

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  • Recommended Credit
    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

    670-850
    Excellent/Good

Why We Chose It

There's a lot to love about the Amex Gold card. It's been a fan favorite during the pandemic because of its fantastic rewards rate on restaurants (that includes takeout and delivery in the U.S.!) and U.S. supermarkets. If you're hitting the skies soon, you'll also earn bonus points on travel. Paired with up to $120 in Uber Cash (for U.S. Uber rides or Uber Eats orders) and up to $120 in annual dining statement credits at eligible partners, there's no reason that the foodie shouldn't add this card to their wallet. Enrollment required.

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  • Weak on travel outside of flights and everyday spending bonus categories
  • Not as useful for those living outside the U.S.
  • Some may have trouble using Uber/food credits
  • Few travel perks and protections
  • Earn 60,000 Membership Rewards® points after you spend $4,000 on eligible purchases with your new Card within the first 6 months of Card Membership.
  • Earn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S., and earn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X).
  • Earn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.
  • $120 Uber Cash on Gold: Add your Gold Card to your Uber account and each month automatically get $10 in Uber Cash for Uber Eats orders or Uber rides in the U.S., totaling up to $120 per year.
  • $120 Dining Credit: Satisfy your cravings and earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, Milk Bar and select Shake Shack locations. Enrollment required.
  • Choose the color that suits your style. Gold or Rose Gold.
  • No Foreign Transaction Fees.
  • Annual Fee is $250.
  • Terms Apply.
  • See Rates & Fees