When you apply for a credit card, you’ll likely see the Annual Percentage Rate (“APR”). Let’s look at what that number means and how you should use it.
APR is the annual cost of your card — it’s the interest you’ll pay, plus charges and fees. It looks like an interest rate, but because it includes other fees and charges, it’s a more accurate representation of what you’ll actually pay.
It’s the best way to compare credit cards — the number to use when choosing your next card. When comparing offers from credit card issuers, start with the APRs, then check out other details, like perks and rewards, as well as extra charges.
Keep in mind that an APR might not include everything. Banks and card issuers may add other charges not included in the APR.
Fees and charges on credit cards can vary, too. If you’re transferring a balance, you may have to pay a fee. Or you might face a charge if you take a cash advance. Some cards charge processing or annual fees. Those fees are often annualized and included in your APR, along with your interest rate. But it’s worth reading closely for what’s included in the APR and what might be charged as separate payments.
The Truth in Lending ACT of 1968 requires that card issuers disclose their APRs. They can still promote a monthly interest rate, but they have to disclose your APR before finalizing your card agreement.
A good APR is all relative. Your APR is always going to be tied to your credit rating. So try looking at multiple offers and find the lowest APR available to you.
If it feels too high, compare your best offer with the national average, which can change but is currently at around 16%. If your APR is double the national average, try working on your credit score. Consider a secured credit card, build a solid payment history and watch for the results in your credit score.
How does APR work?
Your annual percentage rate is expressed as a percentage. That’s an annual percentage - what you’d pay over the course of 12 months.
The APR on your card can vary depending on your credit score, with lower interest rates (and sometimes lower fees) offered to users with healthy credit scores.
With credit cards, different APRs may apply to different charges. Your card might charge one APR for purchases, but a different APR for cash advances. If you’re doing a balance transfer, an entirely different APR might apply to that sum -- while other activity on that same card might incur a different APR.
Late payments can also impact your APR, and sometimes a low introductory APR can apply, usually over a defined period of time, after which the APR can change.
We’ve looked at how APRs are a more accurate representation of the cost of a credit card -- because it includes charges and fees.
Interest rates are included in the APR. But your interest rate might change while you’re using your card. Some credit cards have a variable interest rate, which means the rate is tied to an external indicator, usually a market index.
The fees and charges included in your APR can vary widely. We’re looking at credit cards here, but you’ll see APRs on loans too -- so let’s look at those too:
As we’ve already noted, different APRs can be applied to your credit card, depending on what you use it for. Some APRs are featured in promotions, others are hidden in fine print. Here are some of the important ones to note:
The different APR's on credit cards.
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If you don’t have it yet, download the Bright app for the App Store or Google Play, connect your checking account and your credit cards, and set a monthly goal. Bright will analyze your finances and start paying off the card with the highest interest charges (while also paying the minimum due on your other cards). Bright works automatically, making payments for you, always on time, so you also never pay another late fee.
What is APR and How Does It Work?
With a postgraduate degree in commerce from The University of Sydney, Pranay has his finger on the pulse of the finance industry. Breaking down complex financial concepts is his forte.