Credit card debt can be extremely frustrating to pay off. You make payments month after month, but you never seem to get anywhere. The reason is probably your interest rates. Credit cards have relatively high annual interest rates compared to other types of debts, like mortgages or auto loans. That high credit card APR eats up a big chunk of every payment you make, which makes debt repayment slow and expensive. Here’s why high credit card APR is such a pain and what you can do to make it less painful…

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What is credit card APR?

APR stands for “annual percentage rate,” which is the total cost for a debt over a 1-year period. For credit cards, APR is directly equal to the annual interest rate for the account. APR works differently on loans, where it often includes standard fees for the loan. Credit card APR typically ranges between 10-30%.

APR vs. Interest

APR and interest charges are two interrelated concepts. Interest is basically the “cost” of using credit or loans. A creditor or lender extends you a credit line in good faith that you’ll pay it back. They apply interest charges as part of the cost of using that credit line, along with any fees.

What is periodic interest?

The periodic rate is the interest rate applied over one billing cycle. It’s easy to calculate if you know APR. Simply divided APR by twelve. Then you can multiply that periodic interest rate by your balance. This tells you how much interest you’ll pay in a given pay period.

For example, let’s say you have a credit card APR of 20%. Your balance is $500. If you want to calculate the interest charges, you’d take:

0.2 ÷ 12 x 500 = $8.33

Of course, both APR and interest charges for a billing cycle are listed on your credit card statement. But knowing how to apply periodic interest can give you can easy way to check. It also shows you how much of your minimum payment gets used up covering accrued interest charges each month!

Types of credit card APR

It’s important to note that there are different types of APR that can apply on a single credit card account. Certain interest rates can apply at specific times or for specific types of purchases.

Rate Applies to… Notes
Introductory or Promotional APR Transactions made when you first open the account This is a lower teaser rate that only applies for a specific time period after you open an account; for example, 0% APR for the first 12 months
Purchase APR Regular purchase transactions This is the standard rate that kicks in on charges you make with a credit card after the teaser rate expires.
Balance Transfer APR Only to balances transferred from other credit cards Balance transfer APR tends to be higher that purchase APR, although there are balance transfer credit cards that offer lower APR on transfers
Cash Advance APR Only to transactions where you use your credit card to withdraw money at an ATM Cash advance APR tends to be high compared to other transactional rates; this is why most credit experts recommend that you avoid credit card cash advances.
Penalty APR This rate is applied by the creditor when you do not make payments on time Also known as default APR or late payer APR; trigger for penalty APR varies by creditor – some apply after 60 days of nonpayment, others if you pay late more than twice in 12 months.

Some of these APRs can overlap. For instance, balance transfer credit cards often have two APRs for balance transfers. They have the standard balance transfer APR, but also offer a promotional balance transfer APR when you first open the card.

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How does credit card APR work?

Interest charges on credit card transactions apply differently based on the type of transaction and how you pay your bills. For regular purchases, it’s possible to use a credit card interest-free if you pay your bill in full each month. For balance transfers and cash advances, interest charges apply immediately.

How credit card interest works step-by-step

  1. Most credit cards (not all) have variable interest rates.
    1. That means the rate changes, based on a number of factors, including your credit score and the benchmark rate set by the Federal Reserve.
  2. When you apply for a new credit card, the creditor will tell you the various rates you’ll pay for different types of transactions.
    1. If you have a high credit score, your rates may be lower than someone with bad credit on the same card.
    2. Your credit score also often determines if you qualify for any introductory promotional rates.
  3. Once you open the account, check your credit card agreement to see if the card has a grace period.
    1. This is a set window of time after the payment due date before interest charges apply to purchases
    2. Not all credit cards have a grace period, but if your account does, then interest charges will not apply if you pay off the full balance before the grace period ends.
  4. If your account does not have a grace period, there’s still a way to use the card to make charges interest-free.
    1. You must start and end each billing cycle with a zero balance.
    2. That means you pay off all purchases you make within that billing cycle on the payment due date.
    3. However, if you start a billing cycle with a balance, interest charges will apply even if you pay off the balance in-full that billing cycle.
  5. If you carry a balance over from one month to the next, the creditor applies APR to those purchases.
    1. Most creditors use “periodic daily interest charges,” which calculate interest based on the average daily amount of debt you carried that billing cycle.
  6. If you transfer balances from other cards or use a cash advance to withdraw money at an ATM, interest charges apply immediately.
    1. You should see interest charges apply within the same billing cycle you make these transactions.
    2. Cash advance or balance transfer APR apply only to those specific transactions, not other purchases you make within the same cycle.
  7. Make sure to note when penalty APR applies in your credit card agreement.
    1. The penalty rate can be double your normal purchase APR, so you want to avoid it.
    2. In most cases, you won’t face penalty APR for one payment that’s just a few days late.
    3. However, know when it applies so you can take action to avoid it; otherwise, it will rapidly increase the charges applied each month
    4. If penalty APR applies, the creditor must restore your normal rates once you make six consecutive payments on time.
  8. If your creditor changes your interest rate, they must notify you 45 days prior to the change.
    1. Monitor your monthly statements carefully, as rate change notifications are sometimes buried in the inserts!

How to find your interest rate

Thanks to the Credit CARD Act of 2009, creditors must be very transparent when it comes to your interest rates. They must prominently display the current rates for your account on each monthly statement. You can find the rates listed in a table on your monthly statement – it’s usually listed somewhere towards the back/end of the statement.

The statement should also include a table that explains how variable APR changes. It explains how the creditor calculate your interest rates, which is usually something like “prime rate + margin.”

How to calculate credit card interest

This is the basic formula above for calculating credit card interest. It’s the same formula that we used in the periodic interest example above:

APR ÷ 12 x Current Balance = Interest charges for current billing cycle

Interest charges turn into profits for credit card issuers

You might be wondering why you need to be able to calculate credit card interest, since we just explain where to find it on your monthly statement. The first reason is that it gives you a way to check the interest charges listed in your statement if they seem incorrect. The second reason is that know how to calculate interest helps you understand how much your payment goes to cover interest charges.

If you have APR between 15-20%, then roughly half of every minimum payment you make gets eaten up by interest charges. If your credit card APR is more than 20%, that jumps to two thirds of your payment. Here is an example on a $1,000 balance:

  1. With that balance, you would pay a minimum payment of $25.
  2. At 15% APR, $12.50 of your $25.00 goes to pay interest. So, that’s exactly half of your payment that’s used to cover accrued interest.
  3. At 20% APR, $16.67 goes to pay interest, so you only pay off $8.33 of principal (the actual debt you owe).
  4. At 22% APR (which is a common APR for many reward credit cards), you pay $18.33 in interest charges.

Therefore, most debt management experts recommend paying more than the minimum requirement. You should pay as much as you can to pay off principal faster, because interest charges stay the same, regardless of how much you pay. So, for instance, if you paid $100 instead of $25, then you’d pay off more principal – $87.50 at 15% APR, $83.33 at 20% APR and $81.67 at 22% APR.

See how long it will take to payoff that Credit Card if you only make the minimum payment.

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What is a good APR for a credit card?

Different types of credit cards have different interest rates. For example, secured credit cards and reward credit cards tend to have higher APR than other general-purpose credit cards. Some credit cards are specifically geared to provide low APR, but they won’t offer things like reward programs.

Current average credit card APR

The current national average credit card APR is 17.41%. That’s risen significantly over the past twelve months, since the Federal Reserve has raised interest rates several times since last year.

These are the current APRs for different types of credit cards as of June 7, 2021.

Card type Current average APR
Low-interest cards 12.91%
General rewards credit cards 15.85%
Airline rewards cards 15.51%
Cash back rewards cards 16.03%
Balance transfer credit cards 14.03%
Student credit cards 15.98%
Credit cards for bad credit 25.05%

Source: weekly rate report

What is a good purchase APR for a credit card?

Ideally, you want the APR on any card where you carry a balance to be somewhere between 12-17%. Of course, you will need excellent credit to qualify for such low rates, even on low interest cards. If you have fair or good rate, you at least want to aim for a credit card APR of 20% or less.

The reason for this is that you want the lowest APR possible to apply to a balance that you pay back over time. Reward credit cards are less rewarding if you allow interest charges to apply. In fact, the value of any rewards you earn are usually offset by interest charges within the first 2-3 billing cycles. Ideally, you should pay off reward balances in-full every month to avoid interest charges entirely.

But for big purchases or expensive times of the year (like the holidays), use your lowest APR credit card. That way, you throw less money away on interest charges.

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Credit card APR and the Credit CARD Act of 2009

Creditors can't jack up your credit card APR without noticeThe Credit Card Accountability Responsibility and Disclosure Act was signed into law in 2009 following the Great Recession. It’s also called the Credit CARD Act for short, or the Credit Cardholders Bill of Rights. It was part of the big push to protect consumers following the crash on Wall Street.

Much of the Credit CARD Act focuses on controlling how, when and why a credit card issuer can change your interest rate. Here is a snapshot of how it protects you from annual interest rate changes:

  • Credit card APR can’t change without notice.
  • Credit card issuers can only change your interest rate if:
    • You had an introductory or promotional rate that expires after a set period of time
    • The rate changes because the Federal Reserve raises their prime rate
    • The increase is the result of the cardholder completing a hardship program or failing to complete a program
    • You fail to make payments and the creditor applies penalty APR as outlined in your original credit card agreement
  • The credit card issuer must inform you or any change in your interest rate at least 45 days prior to the adjustment.
  • When the creditor notifies you of a rate increase, they must include a disclosure that outlines your right to cancel.
  • Creditors cannot add penalties or do things like demand immediate repayment if you decide to close your account due to a rate increase.
  • If a credit card company increases your rates due to market conditions or because you’re an increased credit risk, they must provide methods for you become eligible for interest rate reductions.
  • The minimum time period for an introductory interest rate is 12 months and the minimum for a promotional rate is 6 months.
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Lowering APR on existing accounts

While changes in the economy and missed payments can lead to higher rates, there are ways to lower rates, too. You always want to work to have the lowest annual interest rates possible on any of your credit card accounts. This ensures that if or when you carry a balance, you at least minimize the cost of doing so.

But don’t expect that a creditor will lower your credit card APR for you! You must be proactive and call them to ask for a rate reduction. Simply call the customer service line for your credit card and ask to speak to someone about your rate. Then you can negotiate to lower the APR so you can minimize interest charges.

Interest rate negotiation works best when:

  1. Your credit score has improved since you opened the account
  2. You are a loyal customer of a number of years
  3. You’ve always made all your payments on time

Choosing credit cards based on APR

According to a 2018 credit survey, 58% of people look for the lowest interest rate when they shop for credit cards. However, that same survey found that 43% of people say their average interest rates are higher than 16%. So, shopping for the lowest rate alone doesn’t always mean that you achieve your goal of minimizing interest. You may start by looking for low APR, but get lured in by other features, such as reward programs or promotional rates.

This means that you need to choose credit cards by APR when you charge, as well.

  • Purchases that you can pay off in-full are fine for cards that have higher APR, such as reward cards.
  • If you have a large purchase that will take more than 3 billing cycles to repay, don’t use a rewards card; instead, opt for your card that has the lowest APR.
  • For expensive times of the year, such as the winter holidays, use rewards cards with higher APR strategically; but don’t use them for every purchase, since it usually takes people a few months to pay off holiday debt.
  • Only use store credit cards if you can pay off the balance in-full every month; store cards usually have the highest APR and may have costly APR features, such as deferred interest.
  • If you owe more than $2,500 on one or more credit cards, consider a balance transfer. That way, you can pay off the balance interest-free instead of at a high APR.
  • If you owe more than $10,000 on credit cards, look into other options for consolidation; that amount is too high to pay off effectively, even with low credit card APR!

If you owe more than $10,000 in high interest rate credit card debt, let help you connect with the right solution to get out of debt fast!

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More questions about APR

Q:If you pay your credit card on time does APR matter?

A: Yes. Simply paying on time will not stop a creditor from applying interest charges, especially if you only make the minimum payment. There is a way to pay where APR doesn’t matter – where you can use credit cards interest-free regardless of the APRs. However, you must pay in full every month and not just pay on time.

If you begin a billing cycle with a zero balance and then pay off all charges made within that billing cycle before the grace period ends, then interest charges never apply. If your credit card has no grace period, then you must pay off the balance in-full by the due date. This allows you to use credit interest-free.


Q:What is deferred interest?

A: Deferred interest refers to a specialized type of promotional APR. If interest is deferred on a new account, it means that you pay no interest charges during the deferment period. However, deferred interest is not the same thing as a 0% APR introductory rate. With deferred interest, you pay retroactive interest charges at the end of the promotion period. This only happens if there’s still a balance when the deferment period ends. If there is, then you must pay interest charges on the entire amount – even the part you paid off.

Some store credit cards offer deferred interest promotions. You must be very careful with these types of cards. Make sure to pay off all charges before the end of the deferment period. If you don’t, then your balance can balloon when deferment ends.

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Article last modified on April 5, 2022. Published by, LLC