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Credit Card APR: How Credit Card Interest Works

Don’t let high credit card interest rates drag you down into troubled waters.

Don't let high interest rates drag

High credit card interest rates are not your friend if you carry balances over from month to month. But if you understand how credit card apr works, you can make smarter decisions about managing your debt. You can reduce total interest charges to save money and avoid paying more than you should to credit issuers.

Looking for what’s happening to rates today? Click here to jump straight to the latest updates on average credit card APR!

What is credit card APR?

APR is short for “annual percentage rate.” It refers to the interest rate you pay on a particular account over the course of a year. In a technical sense, APR includes both interest and fees that apply to your account every calendar year.

The annual percentage rate is broken down into periodic interest by dividing the annual rate by the number of billing cycles in a year. A creditor multiplies your current balance by the periodic interest rate to determine accrued interest charges for that billing cycle.

Almost all credit cards are set on a monthly billing cycle. So, you can determine your interest charges each billing cycle by diving the card’s APR by 12, then multiplying by the balance.

Pop Quiz

If you have $1,000 on a credit card with 15% APR, how much interest will the interest charges be on your next bill?

a) $5.00

b) $10.50

c) $12.50

d) $15.00

Reveal Answer

(15% APR ÷ 12 months) x $1,000 = $12.50. On a standard 2% minimum payment schedule, your minimum payment would be $20. This means more than half of your payment goes to pay off accrued interest charges each month.

c) $12.50

Return to question

How does credit card APR work?

Credit card interest charges do not apply the minute you make a purchase. In fact, you can avoid interest charges entirely if you pay off your bills in-full each billing cycle.

  1. When you open a new credit card account, the creditor assigns APR based on your credit score.
  2. However, most credit cards have variable interest rates. This means your account’s rate can change if the Federal Reserve changes their benchmark rate. When the fed raises rates, your credit card rate can rise to, even if you have food credit.
  3. Interest charges only apply if you start a billing cycle with an outstanding balance.
  4. Even if you pay the balance off in-full that billing cycle, interest charges still apply for the balance that you carried throughout the billing cycle.
  5. In most cases, a creditor multiplies the monthly periodic interest rate by the “average daily balance” that you hold.
  6. Therefore, if you start a billing cycle at zero and end it at zero, your average daily balance is zero; you pay no interest charges, as a result.
  7. On the other hand, if you start a billing cycle with a balance and end it with a balance, the creditor multiples the periodic interest rate by the average daily balance to determine accrued interest charges.

Keep in mind that this only applies to interest charges on regular purchase transactions. Those are the regular charges you make with your credit card. Other specialized actions usually have specialized APR.

Types of APR

Standard Purchase APR

“APR for purchases” refers to the standard rate that the creditor applies on regular transactions. Anytime you charge something, it’s a regular transaction; interest rate applies in the way described above. If you pay off your transaction every month, interest charges don’t apply at all.

This is especially useful for reward credit cards that tend to have higher APR. If you diligently pay your balances off each month, you don’t offset the rewards you earn with interest charges.

Introductory APR / Promotional APR

This is a special rate that a creditor offers when you first open an account. If you have good credit, you can get cards that offer 0% APR for a period of time; in most cases, the promotional period last anywhere from 6 to 24 months.

Once the promotional period ends, your account reverts to standard APR for purchases. In most cases if you carry a balance at the end of the promotion period, interest charges only apply to the balance left over. In other words, you avoid paying any interest charges on the debt you paid off during the promotion. This is not true if you have an account that has deferred interest charges – something that’s common with retail store credit cards.

Balance transfer APR

This rate applies when you transfer a balance from one existing credit card to a new card. Anytime you do a debt transfer, you usually pay a balance transfer fee as well as a balance transfer APR. This rate applies to the full amount immediately after you make the transfer. So, even if you pay the balance within that first billing cycle, you still pay interest charges.

The only time interest charges to do not apply for these types of transactions is when you get a card that offers 0% APR on balance transfers during an introductory period. These “balance transfer credit cards” can be extremely useful when you need to consolidate debt.

Cash advance APR

This is the rate a creditor applies anytime you use your credit card to withdraw money at an ATM. In  most cases, creditors prefer if you use your credit card to make charges. However, if you need cash and can’t use debit due to insufficient funds, you can make the withdrawal on credit.

Just like the balance transfer rate, cash advance APR applies immediately. Expect to pay interest charges on the full amount you withdraw. In most cases, you also have to pay a separate cash advance fee, too. This high cost is why most experts recommend that you avoid cash advances.

Average credit card APR today

As we mentioned above, most credit card interest rates change based on what the Federal Reserve decides to do with their key (benchmark) rate. When the Fed raises rates, credit card APR generally increases within 2 billing cycles (60 days).

Following the Great Recession, the Fed dropped the key rates to near-zero to stimulate the economy. Lower rates generally mean more people borrow. People are more likely to pursue new lines of credit, leading to economic growth.

Now, however, the Fed wants to get our economy “back to normal” so we can avoid economic issues like runaway inflation. That means raising rates. As a result, the Fed has raised the key rate by 0.25% three times since December 2016. The rate increased by a quarter of a percentage point in December of last year, March and again in early June.

It’s important to note that the increase is not always 1-1. In other words, your rates may rise more than 0.25% – it doesn’t exactly match the key rate increase. As you’d expect, the increase is typically greater for your debt.

What is the average APR on a credit card?

Here’s a look at average credit card APR for different types of credit cards across these increases, courtesy of our friends at

July 2016 avg. rates January 2017 avg. ratesAvg. rates on 6/14 when the Fed announced the last rate hike
National Average15.18%15.42%15.89%
Low Interest11.98%12.22%12.73%
Balance Transfer14.38%14.67%15.13%
Instant Approval18.04%18.03%18.32%
Bad Credit22.56%22.98%22.86%

As we mentioned above, new rates can take up to 60 days to take affect after a rate hike. Check back here to see what happens to rates now that the fed raised them for a third time!

Using average rates to negotiate better rates

If the rates above look low for the types of credit card you hold, then your rates may be too high. You may be able to contact your creditors to lower your rates. This will help reduce the interest charges applied if you carry any balances, which minimizes total cost.

When interest rate negotiation works best:

  1. Your credit score today is higher than when you applied for the account.
  2. You’ve been a loyal customer that’s made on-time payments for several years without any late or missed payments.
  3. You have average rate data like what we provide above to help you negotiate effectively.

So, for instance, if you have an 800 FICO score but you pay 22% APR on a rewards credit card, it’s time to negotiate. Call general customer service for the account and ask to speak with someone who can negotiate rates for you. They’ll usually pass you up to a supervisor. Make sure to have relevant information, like:

  • the average rates for that type of card
  • the number of years you’ve been a customer
  • the last time you missed a payment
  • the number of payments you’ve made on time
  • your credit score

Always keep in mind: Rates don’t matter when you pay in-full!

It’s a good idea to negotiate lower interest rates so if you ever carry a balance, it will cost less. However, if you pay off your debt in-full each month it doesn’t matter if your credit card APR is 12% or 22%. If you start and end billing cycles with a zero balance, you can use your credit cards interest-free.

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Article last modified on May 29, 2018. Published by, LLC . Mobile users may also access the AMP Version: Credit Card APR: How Credit Card Interest Works - AMP.