When comparing credit cards, one of the key factors to consider is the annual percentage rate, or APR. Unlike with other types of loans, credit card APR is a bit tricky to understand since it’s calculated differently. And there are different credit card APRs depending on the type of card activity.
To qualify for a good credit card APR, the key is to maintain a healthy credit score. That said, the average credit card APR is the highest it’s been in a long while, thanks to the Federal Reserve’s interest rate hikes, so your best bet is to try to avoid paying it as much as possible. The best way to do that is to learn more about how APR works, how it’s calculated, the different types of credit card APRs and other “interest”-ing facts.
See our guide below for a breakdown of credit card APR.
[Read: Best Credit Cards.]
What Is APR on a Credit Card?
Credit card APR refers to the amount of interest you’ll pay when you revolve a balance, but it is expressed as a yearly rate. The average credit card APR reached over 20% in 2023, making it expensive to borrow money. While there are cards that offer lower interest, it’s important to look at all of a card’s features when choosing the best card for your needs — especially since there are ways to avoid paying interest.
How Does Credit Card APR Work?
The calculation for credit card APR
is pretty complex, said Leslie H. Tayne, founder and head attorney focusing on consumer and business debt matters at Tayne Law Group. “It measures the cost of borrowing on an annual basis,” Tayne says.
Typically, credit card companies calculate interest on a daily basis. They get the daily rate by dividing the APR by 365. The daily interest rate is then applied to your average daily balance for the billing period. That amount is then multiplied by the number of days in the billing period.
APR vs. Interest Rate
APR and interest rate are closely related but not quite the same, says Rick Fletcher, president of the payables division of Corpay Payables, a leading global business-to-business Mastercard issuer. “APR includes the interest rate, but also adds in any extra fees that your credit card company might charge you,” he says. “So when you see the APR, know that it gives you a fuller picture of what it will cost you to use that credit card for a whole year.”
[READ: Best Credit Cards for No Credit.]
Types of Credit Card APR
If you’ve ever looked at a credit card agreement or your bill, you may have noticed that there are different APRs listed.
— Purchase APR. When you’re comparing cards, this one is the most important APR to look at because it’s the standard rate that’s applied to your purchases if you carry a balance.
— Introductory APR. Some cards offer a temporary, lower APR for new cardholders. Most commonly, you’ll see cards offering 0% APR on purchases for a certain amount of time, such as a year. Once the promotional period expires, the APR reverts to the standard rate.
— Balance transfer APR. Another promotion you might see is a special APR for when you move a balance from one credit card to another. Usually, the rate will be lower than the purchase APR for a period of time — usually from six to 18 months or more.
— Cash advance APR. Taking cash out with your card is costly, mainly because the cash advance APR will usually be higher than the purchase APR, says Tayne. “Interest also starts accruing immediately, without a grace period,” she adds. In other words, even if you pay off the cash advance amount in full by the due date, you will still be charged interest from the date you took out the money.
— Penalty APR. Maxing out your card or paying late multiple times might trigger a penalty APR that’s higher than the normal rate. This is definitely something you’ll want to avoid, especially since some cards keep this rate in effect for an indefinite amount of time.
Where to Find Your Credit Card’s APR
Credit card companies have to be transparent about APR and other account terms and conditions, so it shouldn’t be too difficult to find out how much it is. “First, check your credit card statement that you receive in the mail or access online,” says Fletcher. You can also find this information in the credit card agreement or the terms and conditions that came with your card.
When in doubt, call the customer service number on the back of your card and ask them directly.
[Read: Best Credit Cards for Excellent Credit.]
How to Pay Less in Credit Card Interest
Paying credit card APR can get expensive if you’re in the habit of revolving balances, but the good news is there are ways to keep the costs down and even avoid it all together.
Pay in full each month. “You are only charged interest if you carry a balance from month to month,” says Tayne. So the best way to keep credit card interest to a minimum is to make full payments.
Request a lower APR for your credit card. If you do find yourself revolving a balance on occasion, you can ask the issuer for a better deal. “It’s similar to negotiating for a discount,” says Fletcher. “When you call them, you can mention that you’ve been a responsible customer by consistently paying your bills on time, or you might bring up the fact that you’ve come across better offers from other credit cards.” Keep in mind that they may not always agree to lower your rate, but it’s worth giving it a shot.
Leverage a 0% APR offer. If you are trying to minimize interest charges on an existing balance, consider transferring it to a card with a 0% APR balance transfer, says Tayne. “You can then use that promotional period to pay down the balance more aggressively, since 100% of your payments will be applied to the principal.” The same is true if you know you have to make a large purchase and want a little extra time to pay it off without interest. A card with an intro 0% APR on purchases might be a good option.
When comparing credit cards, one of the key factors to consider is the annual percentage rate, or APR. Unlike with other types of loans, credit card APR is a bit tricky to understand since it’s calculated differently. And there are different credit card APRs depending on the type of card activity.
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What Is APR on a Credit Card? originally appeared on usnews.com
