About APR
Technically speaking, APR (annual percentage rate) is a numeric representation of your interest rate. When deciding between credit cards, APR can help you compare how expensive a transaction will be on each one. It’s helpful to consider two main things about how APR works: how it’s applied and how it’s set.
Applying APR
Generally, credit card companies offer a grace period for new purchases. If you only make purchases and pay off your ending balance each month by the due date, you pay just the amount you owe with no interest. However, if you opt to carry a balance on your card, you pay the agreed-upon interest on your outstanding balance.
Setting the APR
Many variable interest rates start by using an index, such as the U.S. Prime Rate, as published by the Wall Street Journal, and then add a margin. The result is the APR. Note that variable rates can change if the index changes. Additionally, some banks offer a non-variable APR as well.
Calculating what you owe
Banks use a formula to determine how much interest you pay on your outstanding balance. They calculate it using a daily or monthly periodic rate, depending on the card.
Keep in mind some accounts have multiple APRs, so this calculation may be applied for each one. The statement gives you more information about how to calculate the balance subject to interest rate.
Types of APR
There are different APRs based on how you use your credit card. When you’re selecting a credit card, it’s a good idea to consider these rates in addition to your credit needs.
- Purchase APR: The rate applied to credit card purchases.
- Cash advance APR: The cost of borrowing cash from your credit card tends to be higher. There may be a different APR for balance transfers, checks or certain types of cash advances. Cash advances do not have a grace period.
- Penalty APR: Usually the highest APR. It may be applied to certain balances when you violate the card terms and conditions like failing to make payments on time.
- Introductory APR (or promotional APR): Features a lower APR for limited time period. It can apply to specific transactions, such as balance transfers, cash advances, or a combination of the two.
APR and the cardholder
Before you get any credit card, keep in mind:
- The APR can help you evaluate all offers and promotions.
- Lenders cannot change the APR for the first 12 months, unless it’s tied to a promotional or variable rate, or if the terms and conditions are violated.
- Consumers should review terms and conditions, including the APR, before using their cards.
- In most circumstances, companies must give 45 days advance notice of any changes to the APR.
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