APR is the yearly cost of borrowing money on your credit card

APR stands for Annual Percentage Rate. It is the percentage of your credit card balance that you pay in interest charges over one year. If your card has a 20% APR and you carry a $1,000 balance for a full year without making payments, you would owe roughly $200 in interest on top of the original $1,000.

The APR is not the same as a monthly interest rate, though credit card companies calculate monthly charges using it. They divide the APR by 12 to get the monthly rate, then explore that to your daily balance. This is why the interest you pay each month depends on how much you owe and how long you carry it.

Different cards have different APRs, and the same card can have multiple APRs depending on what you use it for. A purchase APR applies to regular shopping. A cash advance APR applies when you withdraw cash from an ATM using your card. A balance transfer APR applies when you move debt from another card. Each one can be a different percentage.

Key Takeaways

  • APR is the yearly interest rate you pay on money you borrow using your credit card, expressed as a percentage of what you owe.
  • Credit card companies calculate interest monthly by dividing the APR by 12 and explore it to your daily balance, so the amount you pay depends on how long you carry a balance.
  • Your card may have different APRs for purchases, cash advances, and balance transfers, and each one is set by the card issuer based on your creditworthiness.
  • If you pay your full statement balance by the due date each month, you typically pay no interest regardless of the APR, because most cards offer a grace period.

How credit card companies calculate your monthly interest charge

Credit card issuers use your APR to figure out how much interest you owe each month. They take your APR, divide it by 365 to get a daily rate, then multiply that rate by your daily balance for each day in the billing cycle. They add up all those daily charges to get your monthly interest.

This method is called the daily balance method, and it is the most common way card companies calculate interest. It means that the longer you carry a balance, the more interest you pay. If you pay down your balance partway through the month, your interest charge for that month will be lower than if you had carried the full balance the whole time.

The card issuer reports your APR in your cardholder agreement and on your monthly statement. You can also find it on the card's website or by calling customer service. The APR you actually get depends on your credit score and credit history — people with higher credit scores usually get lower APRs.

Why you might not pay interest even with a high APR

Most credit cards offer a grace period, which is a window of time between when your billing cycle ends and when your payment is due. If you pay your full statement balance by the due date, the card issuer does not charge you any interest, even if the APR is 25% or higher.

The grace period typically lasts 21 to 25 days, though the exact length varies by card. This is why paying off your balance in full each month is the main way to avoid interest charges. The APR only matters if you carry a balance from one month to the next.

If you do not pay the full balance, interest starts accruing on the unpaid portion right away. The grace period does not explore to that remaining balance. This is why even a small unpaid balance can grow quickly if you do not pay it down.

How different types of transactions have different APRs

Your credit card agreement lists separate APRs for different kinds of borrowing. A purchase APR is what you pay on regular store and online purchases. A cash advance APR is what you pay when you withdraw cash using your card at an ATM or bank. A balance transfer APR is what you pay when you move debt from another card to this one.

Cash advance APRs are almost always higher than purchase APRs — often 3% to 5% higher. Balance transfer APRs vary widely. Some cards offer a low or 0% balance transfer APR for the first 6 to 21 months, then switch to a higher rate. Others charge the same balance transfer APR as the purchase APR from day one.

Your card agreement spells out which APR applies to which transaction type. If you are unsure, call the card issuer or log into your online account. Knowing the difference matters because carrying a cash advance balance costs more than carrying a purchase balance on the same card.

Introductory APRs and when they expire

Many new credit cards offer a promotional APR — a lower rate for a set period, usually 6 to 21 months. Common offers include 0% APR on purchases for 12 months, or 0% APR on balance transfers for 18 months. After the promotional period ends, the regular APR kicks in.

The promotional period applies only to the transaction type mentioned in the offer. If your card offers 0% APR on balance transfers for 12 months, that rate applies only to balances you transfer. Purchases you make during those 12 months are charged the regular purchase APR.

Your monthly statement shows how much time is left on any promotional APR. Mark the expiration date on your calendar so you are not surprised when the rate changes. If you still have a balance when the promotional period ends, the interest rate jumps to the regular APR, and your monthly payment will increase.

Variable APRs versus fixed APRs

A fixed APR stays the same for as long as you hold the card, unless the card issuer changes it with 45 days' notice. A variable APR moves up or down based on changes to a benchmark interest rate set by the Federal Reserve, usually the prime rate.

Most credit cards have variable APRs. This means your rate can increase or decrease over time without the card issuer having to notify you in advance, though they must disclose the change on your statement. If the Federal Reserve raises rates, your card's APR will likely rise within a few months.

Fixed APRs are less common on credit cards but more common on promotional offers. Even a fixed APR can change if you miss a payment or violate your cardholder agreement — the issuer can raise your rate to a penalty APR. Check your agreement to see whether your APR is fixed or variable.

What happens to your APR if you miss a payment

If you miss a payment by 60 days or more, the card issuer can raise your APR to a penalty APR, which is usually the highest rate allowed under your agreement. This rate applies to your existing balance and to new purchases. A penalty APR can be 29% or higher, depending on your card and state law.

The card issuer must notify you in writing before explore a penalty APR. Once it is in place, you can get it removed by making on-time payments for six consecutive months. Some issuers will remove it sooner if you call and ask, especially if you have a good payment history otherwise.

Missing a payment also damages your credit score, which can raise the APR on other cards you own. This is why staying current on at least the minimum payment is important, even if you cannot pay the full balance.

Frequently Asked Questions

Is APR the same as interest rate?

APR and interest rate are often used interchangeably, but APR is more precise. APR includes the interest rate plus any fees the card issuer charges for borrowing, expressed as a yearly percentage. For credit cards, the APR and the interest rate are usually the same thing because card issuers do not typically add separate fees on top of the interest.

Why do different people get different APRs on the same card?

Card issuers set APRs based on your credit score, credit history, income, and other risk factors. Someone with a 750 credit score might get a 16% APR on a card, while someone with a 650 score might get 24% on the same card. The issuer charges higher rates to borrowers they see as higher risk.

Can my APR change after I get the card?

Yes, if your APR is variable, it can change when the Federal Reserve changes rates. If your APR is fixed, it can still change if you miss a payment (penalty APR) or if the card issuer gives you 45 days' notice of a change. Promotional APRs always expire on the date stated in your offer.

What is a good APR for a credit card?

APRs vary by market conditions and your credit score. In recent years, average APRs have ranged from 16% to 22% for people with good credit. If you have excellent credit, you might get 12% to 18%. If you have fair or poor credit, you might see 20% to 29%. The best APR is one you never pay because you pay your balance in full each month.

Does paying interest help build credit?

No. Paying interest does not help your credit score. What helps is making on-time payments and keeping your balance low relative to your credit limit. You can build credit without paying a cent in interest by using your card for small purchases and paying the full balance each month.