Credit card debt can be extremely frustrating to pay off. You make payments month after month, but never seem to get anywhere. The reason is probably your credit card’s APR.

Credit cards have relatively high-interest rates compared to other forms of borrowing money like mortgages or auto loans. Those high credit card APRs eat a big chunk of every payment you make, making debt repayment slow—and expensive. Here’s what credit card APR means, how it works, and why it will affect the way you use your credit card.

What is credit card APR?

When you’re approved for a credit card the card issuer gives you a line of credit, a certain amount of money that you can borrow over and over again. But access to this money isn’t offered for free. Card issuers charge for using that credit line and a credit card’s APR is that cost.

APR stands for annual percentage rate and is a fancy way of saying “the cost of borrowing money”. This number (which is always expressed as a percentage) represents how much a borrower will be charged for the loan or credit line over a one-year period. The higher the APR, the more expensive money is to borrow. These rates can be variable or fixed, which will determine if there’s the potential that an APR can change over time.

A single credit card can have multiple APRs that change depending on the type of transaction a borrower makes with the card. This can make some transactions more expensive than others. Additionally, these APRs can also take effect in different ways than they do a standard purchase (which we’ll cover in-depth, later).

A variable APR is one that will change relative to changes to an index rate. In the U.S., this is usually the prime rate—when the prime rate increases, variable rates increase; when the prime rate decreases, those variable APRs decrease.

Fixed APRs, on the other hand, don’t change. If a person enters an agreement with a fixed rate, their repayment terms will always be at that agreed-upon rate. With variable rates, borrowers can have monthly interest charges that vary from one month to the next. Most credit cards available now are variable—fixed-rate cards are scarce.

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APR vs. Interest rate

Interest rates are a financial concept similar to APR. In terms of credit cards, APR and interest are effectively the same thing. Although a credit card’s terms and conditions will use ‘APR’, the two terms can be used interchangeably.

Like APR, an interest rate is a percentage based on the total amount lent and takes effect on a monthly basis. Outside of the realm of credit cards, however, there are several key differences between them.

When in reference to loans like mortgages or auto loans, APR also includes the fees associated with borrowing that money in addition to the percentage cost of borrowing it. By contrast, interest is strictly a percentage of the total balance and never includes fees in its calculations. This is why credit card APR may not reflect the full cost of borrowing money but is much more straightforward.

Secondly, APR is always a cost, something that a person is charged for borrowing money. Interest, on the other hand, can also reflect money that a person earns. When you deposit money with a financial institution via a checking, savings, or investment account, that institution can use your funds as capital. As a result, they may promise a certain amount of money in return in the form of interest you will receive. This is known as APY or annual percentage yield.

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Types of credit card APRs

Interest charges on credit card transactions apply differently based on the type of transaction and how you pay your bills. When used for regular purchases, it’s possible to use a credit card interest-free if you pay your bill in full each month. With other types of transactions, interest charges may not be avoidable and apply immediately, even if a balance is paid off in full and on time.

 

Rate Applies to… Notes
Introductory or Promotional APR Transactions made when you first open the account This is a temporary 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 promo rate expires
Balance Transfer APR Only to balances transferred from other credit cards Balance transfer APR tends to be higher than 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 is typically much higher compared to other purchase APR and is charged immediately
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, some creditors 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 to find a credit card’s APR

Thanks to the Credit CARD Act of 2009, creditors must be very transparent when it comes to interest rates and prominently display the current pricing for your account on each monthly statement.

Prospective cardholders who want to see the terms for a credit card can usually find credit card rates listed on the terms and conditions in what’s known as a Schumer box (named after the Senator who helped it become official). Below the listed rates and fees there’s usually a section that explains how the creditor will calculate your balance, and how much additional interest they may add to the prime rate.

If you’re looking for the credit card APR of a card you already own, you should be able to view it in your monthly statement balance or by accessing your account online and viewing the card details. If neither of those works, you can find the card’s original APR in the documentation that was physically mailed to you following your approval.

Factors that affect credit card APR

If you’ve ever looked at a credit card’s terms you’ll see one phrase mentioned over and over again: “based on creditworthiness”. Creditworthiness simply means how much a lender trusts that you’ll be responsible for repaying what you borrow. The factors that card issuers use to determine creditworthiness are the same ones that influence your credit score:

  • Payment history (have you missed payments before, are you currently behind?)
  • Your credit utilization rate
  • Whether any of your accounts have gone to collections
  • The age of your credit
  • If you’ve recently opened any new accounts (and how many)

This means that although your credit score can be a reliable indicator of whether or not you’ll be approved for a credit card, that number does not guarantee you’ll qualify for the best possible interest rate.

How does credit card interest work?

There are several factors that can affect how credit card APR is applied and how much is charged:

  • When you pay your credit card bill
  • Whether you pay the full or partial total
  • The type of credit card transaction
  • If the APR is fixed or variable

Credit card APR is a charge that’s only incurred when a borrower does not pay their statement balance in full (a.k.a. by carrying a balance). The remaining unpaid balance is charged 1/12 of the percentage listed as the APR. Why? APR is a number that reflects the annual cost of borrowing so the number stated on a credit card’s terms and conditions does not reflect the monthly interest charge.

This is the basic formula for calculating credit card interest:

(APR ÷ 12) x Current Balance =  Percentage charged for the current billing cycle

Say, for example, you have a balance of $1,000 on a credit card with an APR of 15%. That month you would be charged 1.25% in interest (the APR divided by the number of months in a year) which would be $12.50. This amount would then be added to your total balance and is subject to being charged interest in the future.

Most creditors use “periodic daily interest charges,” which calculate interest based on the average daily amount of debt you carried that billing cycle. Interest compounds daily on a credit card balance that gets carried month-to-month. Each day the balance remains unpaid, it grows a little more. For this reason, if you pay off an outstanding balance in full in the middle of a billing cycle, you will still have interest charges to pay off on your next bill. Those are the daily interest charges accrued prior to the payoff.

Why making minimum payments can put you in debt

If you have an APR between 15% and 20% and are only making minimum payments, roughly half of those payments 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 with 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.

It’s easy to see how interest charges can quickly cause your card balance to snowball and make your monthly payments less effective at paying down debt. Reducing or eliminating interest is a key step to digging yourself out of a financial hole. You can try to negotiate a lower APR yourself or work with debt relief professionals who can do the negotiating for you.

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How to avoid paying credit card interest

It’s very possible to own a credit card without ever paying interest. Credit cards only charge interest if you don’t pay your balance in full and carry it over from one month to another. As such, borrowers can avoid paying interest charges if they pay:

  1. The entire statement balance and
  2. Do so within a set number of days after the close of the billing cycle

While that might sound intimidating, there are two key elements that make avoiding interest charges easier than you probably think.

Statement balance vs current balance

By default, the card balance that’s displayed when you view your account is the current balance. This is a total of all your purchases, those from the previous billing period and the current one. A statement balance, on the other hand, only includes the transactions that were made during the current billing period (which may not be a calendar month but in between months).

This is good news if you’re trying to avoid paying credit card interest. You don’t have to pay the entire current balance, only what you’re charged during the billing cycle—far less intimidating. More good news: Most autopay features include the option to just pay the statement balance. This is one of the best and easiest ways to ensure you never pay credit card interest.

Credit card grace periods

But, hey, life happens and you may not be able to pay your credit card bill by the due date, much less set up autopay. Perhaps you don’t have consistent income or you’re waiting on a paycheck to drop so that you can make the payment. In any case, you’ve still got the chance to avoid an interest charge.

Card issuers are legally required to give borrowers a minimum of 21 days after the close of the billing cycle to pay their bill before being charged interest. This is known as a grace period. The precise length of your credit card’s grace period may be longer depending on the card or the issuer, refer to the card’s Schumer box for detailed pricing and fee information of your specific credit card.

Note that this grace period may not protect you from incurring late fees or other penalty fees. Additionally, the grace period does not apply to transactions other than purchases. Balance transfers and cash advances will result in interest charges on the same day of the transaction.

What is a good APR for a credit card?

The goal is always to have the lowest APR possible. That way if you ever need to carry a balance, you’ll end up paying less over time. But credit cards have some of the highest APRs when it comes to borrowing money (there’s no federal law that limits how high they can be) which can make this a tricky endeavor.

In the second quarter of 2022, the average card APR was nearly 17% (though there are some cards with APRs as much as 30% or higher). As such, any rate below that 17% could safely be considered a good APR for a credit card.

But as with most things personal finance, this isn’t completely cut and dry. “Good” is subjective and will depend on two key things: the type of credit card and the state of your credit score.

The type credit card can affect APR

Different types of credit cards have different interest rates. Reward credit cards, for example, which have fun perks like sign-up bonuses or cash back, tend to have higher APR than other general-purpose credit cards. There are credit cards created specifically to have low APRs, but they usually won’t offer things like reward programs. It’s safe to assume that the more incentives a credit card offers, the greater the APR will be.

The current APRs for different types of credit cards as of August 2022.

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: CreditCards.com weekly rate report

Reward credit cards are less rewarding if you allow interest charges to apply. In fact, the value of any rewards you earn is 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 costly interest charges.

Your credit score can affect card APR

Regardless of whether a card offers rewards or not, the ultimate determining factor of how good a rate you qualify for will be your credit score. The better your score, the lower your rate is likely to be (remember, it’s your credit history that card issuers look at, not just your score). If you have anything less than good credit, expect that you’ll have a higher cost of using a line of credit.

How to tell if you got a good interest rate on a credit card

The easiest way to determine whether you got a good credit card rate is simply to look at a card’s terms and conditions. Since most credit card APRs are determined by creditworthiness, they provide a range of what the card’s APR could potentially be. Compare where the rate you were approved for falls within that range and you’ll have your answer. The closer you are to the lowest rate possible for the card, the better you fared. Bonus, you’ll get an idea about how creditworthy credit card issuers think you are.

How to lower your credit card APR

While changes in the economy and missed payments can lead to higher rates, there are ways to lower rates, too. You always want to have the lowest annual interest rate. This ensures that if or when you carry a balance, you minimize the cost of doing so.

But don’t expect a creditor to lower your credit card APR for you! You must be proactive and contact 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 have been a loyal customer for years
  3. You always pay on time

Credit CARD Act of 2009

The Credit Card Accountability Responsibility and Disclosure Act, also called the Credit CARD Act for short or the Credit Cardholders Bill of Rights was signed into law in 2009 following the Great Recession. 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 to 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.

How to use a high APR credit card wisely

According to a 2018 Debt.com 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 had average interest rates higher than 16%.

  • Only use it if you can pay off the balance in full every month. If you have a large purchase that will take more than 3 billing cycles to repay, opt for a card with the lowest APR instead.
  • Don’t simply use a high APR card because it’s where you may earn the most rewards. If you can’t pay off the balance in full, you’ll likely pay more in interest charges than those rewards are worth.
  • 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!
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Credit card APR FAQs

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

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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.

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Q:What is deferred interest?

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A: Deferred interest is type of promotional APR where you pay reduced or no interest charges during the deferment period. However, it 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 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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Q:What is periodic interest?

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A: 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:

(20% ÷ 12) x $500 = $8.33 in interest charges

Knowing how to calculate periodic interest shows how much of your minimum payment gets used towards accrued interest charges each month. You can also find this information listed on your credit card statement.

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Q:Can my credit card APR change?

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A: Yes, a credit card’s APR or interest rate can change for multiple reasons. Most credit cards have variable rates and therefore are subject to changes in market conditions (fixed rate credit cards exist but they’re really rare), which do happen periodically.

Your credit card agreement likely includes the issuer’s base APRs so you can see what your rate might be if there was a change in the market. Fortunately, credit card issuers also establish a maximum APR so there’s a ceiling as to how high your APR can be. If you have a fixed rate credit card, issuers usually won’t increase your rate within the first year that it was opened. If they do end up changing it, they’ll have to give at least 45 days’ notice in writing before the new APR takes effect.

Credit card APR can also change your APR if your account is over 60 days past due, Since this is a violation of your card agreement, even fixed-rate card issuers have the authority to change your card’s interest rate without notice. This is known as a penalty APR, which can remain indefinitely even after paying the overdue balance.

Monitor your monthly statements carefully. Rate change notifications are sometimes buried in the inserts!

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

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Article last modified on September 15, 2022. Published by Debt.com, LLC