You may have heard that you should look for a credit card with a low APR. It’s good advice, but what does it actually mean?
According to the Consumer Financial Protection Bureau (CFPB), “a credit card’s interest rate is the price you pay for borrowing money. For credit cards, the interest rates are typically stated as a yearly rate. This is called the annual percentage rate (APR).” Your credit card issuer must disclose your APR before they can activate your account, and it should also appear on your account statements. The card issuer is also responsible for informing you of the “periodic rate,” which is the rate they apply to your outstanding balance to calculate the finance charge for every billing period.
What is an APR?
Last Updated: February 15, 2024
5 min read
Key points about: what APR means
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An annual percentage rate (APR) is the interest rate your credit card company uses to determine any interest you may owe.
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In addition to the standard purchase APR, there may be additional APRs like an introductory or penalty APR.
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You can usually minimize the effects of APRs by paying the full balance by the due date monthly.
What does APR mean?
APR stands for “annual percentage rate.” Your credit card may not have just one annual percentage rate for interest, as the APR may vary based on how you’re using your card.
How credit card APRs work
APRs are the interest rates your credit card issuer may charge for different types of transactions. The different types of APRs include:
Standard purchase APR
The cost of purchases is what many people think of when they refer to APR. It’s the interest rate your card applies to purchases if you don’t pay the bill in full by the due date.
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%—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 balance transfers, but sometimes includes both balance transfers and purchases.
Zero percent APR on balance transfers and purchases means that if you pay at least the minimum payment due each month, you won’t have to pay interest on the balance you carry during that introductory period.
What is a 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 to a new credit card. If your current credit card has a high interest rate, it may make sense to transfer the balance to a card with a lower interest rate. However, it’s important to keep in mind that balance transfers also often come with balance transfer fees, so the process is not free. Also, the low intro APR that enticed you to make a balance transfer will eventually expire, and then the standard APR will apply to the remaining balance. You want to pay off the balance transfer as soon as you can so you don’t accrue more interest.
Cash advance APR
A cash advance is when you use your credit card to take out cash. 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 there’s a flat fee and sometimes it’s a percentage of the amount you borrow. The cash advance APR can be higher than the standard purchase APR.
Penalty APR
A penalty APR may apply to your account if you don’t make the minimum payments on time. That penalty APR can be as high as 30%. Check your cardmember agreement to see how it will apply to your account. If you make the minimum payments due, you’ll be carrying a balance subject to the standard purchase APR. But as long as you’re making those payments on time, your card issuer won’t impose a penalty APR.
Your card issuer usually bases your APRs on the prime rate and your creditworthiness. If you pay your monthly payment in full and on time every month, don’t get cash advances or take balance transfers, and if your card offers a grace period, your card issuer probably won’t charge interest on your purchases, making your APR less of a concern.
Can my APR change after I get my credit card?
If your credit card came with an intro APR, the APR will rise when the introductory period expires. Your card issuer may also raise your APR if your credit score goes down, because a lower credit score makes you riskier to lend to.
According to the CFPB, federal law requires credit card issuers to give notice before changing your APR, so you’ll normally have 45 days to agree with the new rate or cancel your card. Your credit card may also have a variable APR that is adjusted based on the prime rate, but this type of change doesn’t require advance notice since it’s already in your cardmember agreement.
What is a good APR for a credit card?
Credit card issuers may consider your credit score in determining your APR, so different applicants may be offered different APRs. The average APR fluctuates with the economy, so the best way to find a good APR for you is to compare the APR ranges in the current terms of any cards you’re considering.
Did you know?
The best APR is 0, because that means no interest is applied to the applicable balance. While you won’t find a credit card that offers 0% APR forever, it’s possible to find 0% intro APR offers, and you can check the length of the intro period to find out how long you’ll be able to enjoy a 0% APR.
How will my APR affect my credit card payments?
The lower your APR, the lower the interest charge you’ll pay on an outstanding balance. The Discover credit card interest calculator shows you the effect of changing your interest rate. You can calculate your balance using different APRs to find out how long it’ll take to pay off your credit card at your current rate vs. a lower rate.
How to get a better credit card APR
Since people with high credit scores get the best APRs, raising your score may qualify you for a better APR from a lender. You can request a free credit report at annualcreditreport.com, and check which factors are affecting your score. If your score is low due to missed or late payments, making sure to pay on time each month will eventually raise your score and qualify you for a better APR.
Does a good credit card APR always matter?
If you pay off your credit card statement balance in full and on time each month, you won’t incur any interest on purchases as long as you have a grace period on your account. You can minimize the impact of APRs on your account—even if they’re high—by paying the statement balance off each month, and not taking cash advances or balance transfers.
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