A credit card’s annual percentage rate (APR) and interest rate are often the same. However, understanding the difference between APR and interest rate could save you money over the terms of your other loans. A loan’s interest rate is an integral part of its APR. However, the formula for a loan APR includes additional fees and charges. The more you know about the differences between interest rates and APRs for credit cards and loans, the better you can manage your financial life.
APR vs. Interest Rate
Last Updated: May 29, 2024
4 min read
Key Points:
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An interest rate is a percentage charged on a principal loan amount that shows the cost of borrowing.
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The terms "annual percentage rate" (APR) and "interest rate" are usually the same for credit cards. For loans, the APR includes both interest and other expenses.
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When you understand the difference between interest rates and APRs you can make informed choices about loans and mortgages.
What is an interest rate?
Your interest rate is the amount it costs to borrow money, expressed as a yearly rate. Lenders typically use federal benchmark rates—which change in response to economic conditions—to determine their interest rates. However, each company uses its own formula to determine interest rates for individual accounts.
With credit cards, if you don’t pay your balance in full by the due date each month, your credit card issuer charges you the interest rate on the unpaid balance. Unpaid loan balances accrue interest until you pay off the total amount (including the principal loan, fees, and interest).
Your credit history and your credit score play significant roles in determining your interest rate on a credit card or loan. Lenders may also factor market conditions into their interest rates. Credit card providers use a fairly complex calculation to determine your interest charges.
Your average daily balance during a billing period determines your interest charge, which compounds daily. If you pay off your balance each month, you may not owe any interest on your credit card.
What is an APR?
Your APR (annual percentage rate) refers to the yearly interest rate your credit card issuer charges you for carrying a balance on your card. There are different types of APRs for credit cards, including an introductory APR, a penalty APR, and a standard purchase APR.
A purchase APR is the interest rate your credit card company charges on purchases if you don’t pay your entire balance by the due date. Your credit report, including your history of repayments, credit utilization ratio, and account balances, plays a significant role in determining your APR.
Credit card APR vs. interest rate
Credit card issuers typically use the terms "APR" and "interest rate" interchangeably. Credit card providers may charge borrowers extra for late payments, balance transfers, or other transactions. However, they don’t know who might incur each fee in advance. Because different borrowers may have different fees, an APR can’t fairly or reliably include those costs for credit cards.
When comparing credit cards, you don't usually have to worry about identifying both APR and interest rate—the two figures should mean the same thing. Many credit cards offer a low introductory APR during a specified time after you open your account. When that promotion ends, the standard purchase APR applies, so the credit card account begins accruing interest if there’s an unpaid balance.
Since credit card companies may charge different APRs for different types of transactions (introductory APR, penalty APR, standard purchase APR, introductory balance transfer APRs, etc.), make sure to check your card’s terms and conditions for a complete list of APRs.
Did you know?
You can use the Discover pre-approval tool to see if you qualify for a Discover® Card with a low introductory APR offer.
Is there a difference between an APR and an interest rate?
APRs and interest rates are the same when it comes to credit cards. When it comes to personal loans, they’re calculated differently.
Interest rates show the proportion of a loan that a borrower must pay a lender each year they pay down the principal.
A loan's APR includes its interest rate as well as fees, which can impact the price.
With the exception of revolving lines of credit (like a credit card or a home equity line of credit), a loan's APR is typically a higher percentage than its interest rate. For example, according to the Consumer Financial Protection Bureau, a mortgage APR may factor in a broker fee, discount points, insurance, and escrow fees on top of the interest rate. Other loans may charge origination or documentation fees.
To find the best loan for your unique circumstances, it’s wise to consider interest rates, APRs, and any factors that may change those rates over the loan’s term.
While interest rates and APRs overlap for some types of credit, knowing the difference between the rates for certain loans helps you evaluate how much you’ll owe. As you compare loan options, looking at both figures can help you avoid paying more in the long term.
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