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.
What is APR on a credit card?
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.
What is a good APR?
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.
What’s the difference between APRs and interest rates?
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.
What fees can be included in my APR?
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:
- Processing fees: These are fees your bank charges for completing your request for a loan or credit card.
- Underwriting fees: The underwriter reviews your loan or credit card application and decides whether to approve it or not. This fee is for them.
- Document fees: These fees are charged for drawing up contracts and agreements that you’ll sign when accepting a loan or credit card.
- Appraisal fees: For a home loan, this is a fee for a professional to review and place a value on the home you’d like to purchase.
- Origination fees: This is an upfront fee designed to compensate your lender for putting a loan together.
- Dealer prep: Auto dealers often include this fee in their APR, as compensation for preparing a vehicle for sale.
What are different APRs on credit cards?
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:
- Introductory APR: This is given to new customers for a set number of months when they initially open their credit card. To broaden its appeal, this rate is lower than the regular APR, often as low as 0%.
- Purchase APR: Whenever you use your card to buy anything, whether it's online or in person, this interest rate will be applied if you don’t pay your balance in full and on time.
- Balance Transfer APR: This is the interest rate you'll pay on balances you transfer to a credit card or debit card from an existing credit card. It’s often lower than your Purchase APR, to encourage more transfers.
- Cash Advance APR: This is the interest rate applied when you borrow cash on your credit card. This is usually always higher than your Purchase APR and typically does not come with a grace period.
- Penalty APR: This is usually the highest APR that can be applied to your account and is applied when a payment is more than 60 days delayed.
The different APR's on credit cards.
How can Bright help with my APR?
Bright is brilliant at managing credit card debt, finding the fastest, smartest way to lower your interest charges and pay off your cards.
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.