You might have encountered the term APR during the process of applying for a new credit card. Officially, APR stands for Annual Percentage Rate. Whether you’re a newcomer to credit cards or a seasoned cardholder, understanding the concept of APR is essential. The term APR is frequently used interchangeably with Annual Interest Rate (AIR), although this can vary depending on the specific credit product. For credit cards, APR and AIR generally represent the same cost.
Understanding what APR entails, how it’s computed, and how it’s applied can empower you to make well-informed decisions regarding credit.
What is an APR?
APR, or Annual Percentage Rate, is essentially the expense associated with borrowing money. Most credit card companies express this rate on an annual basis. Therefore, to determine your monthly interest cost, simply divide the APR by 12. For instance, if your APR is 18%, dividing that by 12 reveals a monthly fee of 1.5% on any unpaid purchases within your billing cycle.
To avoid incurring interest charges when using your credit card, aim to pay your bill in full every billing cycle. Carrying a balance beyond the due date and only submitting the minimum monthly payment is one of the most common ways you’ll encounter APR charges on your subsequent bill.
More Examples
Let’s illustrate with an example: You buy an item for $400 with an 18% APR and make only the minimum payment of $16 per month. It would take nearly three years (34 months) to clear this balance. Ultimately, it would cost you an additional $114 in interest.
To circumvent these interest charges, ensure you settle your bill within the credit card’s grace period. Most credit card companies extend a minimum grace period of at least 21 days from the conclusion of your billing cycle. This grace period concludes upon the due date for payment.
Types of APRs
There are different types of APR, depending on exactly what they are for and how they are applied. Here are the most common ones you’ll encounter.
Purchase APR
This APR is straightforwardly the rate applied to new purchases. Every standard purchase conducted with your credit card will incur this APR unless you clear your balance by the conclusion of the billing cycle.
Balance Transfer APR
This represents the APR applicable to any balances transferred to your credit card, which can fluctuate significantly. At times, these rates may surpass your purchase APR. Nonetheless, if you possess good credit, financial institutions frequently promote a lower APR for balance transfers to entice you to transfer your debt to their card.
Introductory APR
Many credit card companies provide an introductory promotional rate to new account holders, usually lasting between six and 24 months. Some extend this rate to both purchases and balance transfers. These promotional rates often entail an exceptionally low interest period, occasionally reaching as low as 0%—meaning no interest at all! Such offers present an excellent opportunity to minimize interest expenses and potentially reduce debt.
Cash Advance APR
This APR applies when you withdraw cash from your credit card, commonly known as a cash advance rate. Typically, this rate is the highest among your card’s charges and often does not come with a grace period. Interest accrues immediately after the cash is withdrawn. As a general guideline, utilizing your credit card for cash advances is discouraged due to its high costliness.
Penalty APR
Paying your bills late is never advisable, especially considering the steep penalty it incurs. Most credit card companies impose a penalty of up to 29.99% when your bill remains unpaid by the due date. This penalty applies even if you’ve only paid the minimum balance, which some may mistakenly consider an adequate amount.
What Affects your APR?
The APR you’re offered often hinges on the prime rate, which represents the best interest rate companies extend to their customers. There are two types of APRs available: fixed and variable.
With a variable APR, your rate typically fluctuates in tandem with changes in the prime rate. If the prime rate decreases, your APR tends to decrease as well; conversely, if the prime rate increases, your APR rises accordingly. Variable APRs also vary based on your credit score. Cardholders with excellent credit scores (780 to 900) usually receive an APR toward the lower end of the spectrum. Those with average to good credit (679 to 779) can expect a mid-range APR. Individuals below the 650 mark typically incur a higher APR.
On the other hand, if you opt for a card with a fixed APR, you’ll receive the same rate regardless of your credit score or fluctuations in the prime rate. While the issuer may still adjust the interest rate, such changes typically occur only after a written notice is issued.
How to Find Your Credit Card’s APR?
Your APR will be clearly indicated on each monthly statement you receive, usually in the section detailing how your interest charges are computed. Additionally, you can typically access your APR when logging into your online account or mobile banking app. If you encounter difficulty locating this information on your statement, don’t hesitate to contact your credit card’s customer service number and speak with a service representative—they’ll be able to assist you.
How to Avoid APR Charges
The best way to avoid falling into credit card debt is to prevent APR charges. Here are two ways to avoid interest charges.
Pay Your Balance in Full Every Month
As we’ve emphasized before, setting up autopay is truly the easiest method to sidestep interest charges. By arranging for your balance to be automatically paid every month, you can ensure timely payment. However, remember to review your statement for any errors and verify that sufficient funds are available for your payment date.
Open an Intro 0% APR Card
These introductory rate cards may provide up to 18 months of interest-free on new purchases or up to 24 months of interest-free on balance transfers. However, it’s crucial to pay off your balance before the introductory period concludes. Otherwise, you risk interest being applied to the entire balance, nullifying any potential savings. If you consistently carry a balance into each new billing cycle, contemplate opening a new low-interest credit card and transferring the balance. With numerous options available, this approach can aid in saving money.