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If you have a credit card, chances are you've seen the term annual percentage rate (APR), but you may wonder what that means.
The term APR is often used interchangeably with interest rate, though it can sometimes differ depending on the credit product. For the sake of credit cards, the APR and interest are typically the same amount.
When you sign up for a credit card, it's important to know the various APRs, since it can have a big impact on how much you owe if you carry a balance month to month.
Below, CNBC Select reviews the different types of APRs, what impacts them, where to find your APR and how you can avoid interest charges.
An APR is the interest rate you are charged for borrowing money. In the case of credit cards, you don't get charged interest if you pay off your balance on time and in full each billing cycle.
Card issuers express this rate annually, but to find your monthly interest rate, simply divide by 12. If you have a 22.74% APR, divide by 12 to get 1.895% as your monthly interest rate.
A common way you may incur APR charges is by only making the minimum payment on your credit card, thus carrying a balance past the due date. Interest rate charges can add up fast on credit cards.
For example, let's say you have a $1,000 balance, 22.74% APR and only make the minimum $35 payment each month. It would take you over three years (about 42 months) to pay off your balance and you'd wind up paying roughly $453 in interest charges.
These steep charges can be avoided by paying off your balance within a credit card's grace period. Many cards offer a grace period, which is the period of time between the end of a billing cycle and when your bill is due. During this period, you may not be charged interest on your balance — as long as you pay it off by the due date.
Many credit cards have a range of APRs based on the actions you take, such as making a purchase, completing a balance transfer, taking out a cash advance and more. Here's how each APR works.
- Purchase APR: This is the interest rate charged on new purchases.
- Balance transfer APR: This is the interest rate applied to balance transfers and may be equal to or greater than the purchase APR.
- Introductory APR: Many credit cards offer intro APR periods that charge no interest for a set length of time (up to 21 months). During the intro 0% APR period, you may benefit from no interest on new purchases, balance transfers or both. These offers are a great way to save on interest charges and get out of debt.
- Cash advance APR: The interest rate you incur if you take out a cash advance. This rate is often one of the highest APRs you can be charged and cash advances incur interest immediately with no grace period.
- Penalty APR: When you pay late, card issuers may penalize you with an interest rate that's higher than your regular APR.
The APR you receive often varies with the prime rate, which is the best interest rate issuers charge consumers, unless you open a credit card with a fixed APR. With a variable APR, when the Fed decreases the prime rate, your APR typically decreases, just as it goes up when the Fed raises the prime rate.
Variable APRs also fluctuate based on an applicant's credit score. For example, the Chase Sapphire Preferred® has a 15.99% to 22.99% variable APR. Cardholders with excellent credit scores (800-850) will likely receive an APR closer toward the lower range, while those with a good credit score (670-799) may receive a higher APR.
If you have a fixed APR, which is harder to find, everyone receives the same interest rate, regardless of credit score. The card issuer can still change the interest rate, but typically only after sending a written notice.
Card issuers list your APR on your monthly billing statement in the section about how your interest charges are calculated. And you can often view your APR after logging into your account online or via your bank's mobile app. There's also the option to live chat or call a customer service representative if you're struggling to find the number on your bill.
It's important to avoid APR charges so you don't risk falling into debt. Here are two ways to avoid interest charges.
- Pay your balance in full every month: This is a foolproof way to avoid interest. You can set up autopay, so your balance is automatically paid each month.
- Open an intro 0% APR credit card: These cards can offer up to 18 months no interest on new purchases or up to 21 months no interest on balance transfers. Just make sure you pay off any balance before the intro period ends. (Check out the best balance transfer credit cards.)
If you still find yourself carrying a balance month to month and incurring high interest charges, consider opening a low interest credit card.
Learn more: How do 0% APR credit cards work?
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