What Is APR? Learn How to Make the Best Of Your Credit Card

What Is APR? Learn How to Make the Best Of Your Credit Card
Point Editorial

All credit cards come with interest rates that vary depending on the card and the credit issuer. The most common interest fee is APR, which stands for annual percentage rate. This is how much it costs to use a card annually, including any additional fees. 

On average, a good APR is approximately 14 percent. However, you need very good credit to achieve this. 

Read on to learn more about the different types of credit card APR, how APR works, and how to calculate it. 

What is APR?

Factored into your monthly bill payments is your credit card's APR. Essentially, since nearly every card incurs a balance, most users will have to pay APR. 

Factors that can cause your APR to increase include using your card for cash advances, missing payments, or paying your bill late.

If your rate changes, you have the right to be notified by the card issuer.  

How does APR work?

Most credit companies allow for a grace period (typically 21 days) during which, if the balance is repaid in full, you won’t have to cover interest costs. However, any portion of that balance that you do not pay off will be carried over to the next billing cycle and will gain APR. 

Keep in mind, however, that APR is not the same as a regular interest rate. APR is an umbrella term that can encompass multiple fees, including lender fees, insurance fees, the costs of closing a credit account, and the interest rate. 

Understanding how credit cards earn interest is crucial before you apply for a card of your own. Otherwise, you may face unexpected costs. Doing your research and practicing intelligent monetary habits by utilizing the right tools is the first step to avoiding excessive APR and saving instead of spending more.

One particular tool that can help you in this endeavor is Point Card

Specifically designed as an alternative to traditional debit and credit cards, Point offers built-in transparency and encourages financial independence amongst cardholders. You work hard for your money, and Point rewards you for that behavior through exclusive benefits, including unlimited cash-back on all purchases and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shops. 

Plus, Point Card comes with car rental and phone insurance, fraud protection with zero liability, and no interest rates. So, you can have peace of mind knowing that not only will you earn extra money, but you will be able to save because there are no additional fees.  

Put simply, Point is a great tool for intelligently navigating your financial journey.

Why is APR so important?

APR is important because it signifies the fiscal cost of borrowing money. Having a credit card is a service extended to you by the issuing company, so you have to pay to use it continually.  

When you apply for a card, the company will run a credit check on you, also known as a hard inquiry. Your final credit score, payment history, credit mixes, and previous credit utilization, among other factors, will determine how much interest you must pay. 

Those with good credit scores usually receive favorable interest rates. According to FICO, the most popular model for score calculations, a good score to strive for is 670 or above. Therefore, it is always wise to try and boost your score before applying for a card. The process will be much smoother. 

APR helps make budgeting for credit card payments much easier because it allows you to calculate how much you will owe altogether for your monthly purchases, depending on whether or not you pay your bill in full and on time. 

Fixed APR versus variable APR

Rates can be either fixed or variable. Fixed rates will not go up or down for the duration of the loan agreement, while variable rates are subject to fluctuation. 

Fixed APR widely applies to mortgages and personal loans. 

Usually, a credit card's APR is variable. If and when it does shift, however, it isn’t usually by much.

5 steps to calculate APR

Outlined below are the five basic steps to compute a credit card's APR.

Step 1: Figure out how your balance compounds interest. Also known as the daily rate, this refers to how much interest your card earns day to day. You can find this included in the pricing information that accompanies your card.

Step 2: Calculate your daily periodic rate. This is also known as how much interest you're paying on your balance during each billing period. By multiplying your APR rate by 365, or the total number of days in a year, you can determine this number. 

Step 3: Calculate your average daily balance. You'll need to know the exact balance owed to figure out this value. If your statement does not include this number, you can find it by adding up the total charges you've made with your card and dividing up the total number of days in the billing cycle. 

Step 4: Multiply the value from steps two and three and the number of days in your billing cycle. 

Step 5: Finally, multiply the remaining value by 100 to come up with a percentage. You now know your APR. 

There are online calculation platforms that can help you figure out your APR rate as well. 

If you pay your balance off entirely, you don't have to worry about APR. You will not have earned any extra interest because you don't have any portion of your balance that is unpaid. 

Most Americans, however, have acquired credit card interest, according to data collected by Experian.  

What are the different types of APR?

In addition to fixed and variable rates, there are five other kinds of APR that are good to be aware of before applying for a credit card.

Introductory APR

Many cards offer an introductory period with no APR. You do not incur interest for the purchases you make during this time. However, you will have to start paying this at a regular rate when that period is over.  

Purchase APR

As the name suggests, this type of APR applies to the charges you make with your card. Purchase APR is approximately 16 percent. This is easy enough to avoid as long as you pay your balance off in full from month to month before the 21-day grace period ends. 

Balance transfer APR

A balance transfer means that you shift your outstanding credit card balance over to another card with a lower balance. It is possible to acquire a balance transfer that has a zero introductory period of 15–18 months.

Cash advance APR

Generally speaking, cash advances can be costly, and the APR rates associated with them can be significantly higher than the APR for the credit card itself. This is one of the primary reasons you should only take out a cash advance if absolutely necessary. 

Penalty APR

Lastly, this type of APR refers to the interest that compounds as a result of late or missed payments. Again, penalty APR can be much higher than ordinary APR and, depending on how often you miss a payment's due date, can extend for several months. 

How do you get a low APR credit card? 

Tip 1: Pay your bills on time. This is arguably one of the easiest and most effective things you can do to obtain and maintain a low APR. Setting up automatic payment transfers can greatly benefit you as you won't have to stress about possibly missing due dates. 

Tip 2: Avoid exceeding your credit limit. Experts recommend that you never use more than 30 percent of your available credit. Exceeding that limit will be detrimental to your credit score and will lower your chances of obtaining a new credit card in the future. 

Tip 3: Only apply for the credit you need. Applying for multiple lines of credit, specifically over a brief amount of time, can also influence your score. Each time you do, a note appears in your file, and, in the eyes of banks and other lenders, this does not reflect prudent borrowing behavior. 

Tip 4: Monitor your credit. Staying informed of your credit score is a highly effective way to help you earn a low APR. The better your score is, the more negotiating power you have. Every year, you are entitled to one free credit report from any of the three major credit bureaus: Experian, Equifax, and TransUnion

Ultimately, demonstrating consistently responsible behavior will be your best weapon against higher interest fees. It will also serve you well when you're seeking to achieve other major financial goals down the road, such as applying for a mortgage or a vehicle loan.

about the
Point Editorial
A group of writers, thinkers, & designers from varying backgrounds — all part of the PointCard team. Sharing perspectives on concepts in design, finance, and culture through an everyday lens.
Made to spend.
Unlimited cash-back, exclusive rewards & comprehensive benefits.
Sign up today

Additional Reading