APR is the yearly cost of borrowing money on your credit card

APR stands for Annual Percentage Rate. It is the percentage of your credit card balance that the card issuer charges you in interest over one year. If your card has a 20% APR and you carry a $1,000 balance for a full year without making payments, you would owe $200 in interest charges on top of the original $1,000.

The APR is not the same as the interest you actually pay. The real interest depends on how long you carry a balance. If you pay off your full statement balance by the due date each month, you pay zero interest, regardless of the APR. The APR only matters when you carry a balance from one month to the next.

Different credit cards have different APRs. A card issuer decides your APR based partly on your credit history — people with higher credit scores usually get lower APRs — and partly on the card itself. Some cards are designed for people building credit and carry higher APRs. Others are designed for people with strong credit and carry lower APRs.

Key Takeaways

  • APR is the yearly interest rate charged on a credit card balance you do not pay off by the due date.
  • You pay no interest if you pay your full statement balance each month, even if the APR is high.
  • Your credit score, credit history, and the type of card all affect what APR you receive.
  • Credit cards often have multiple APRs — one for purchases, one for balance transfers, and one for cash advances — and they can be different from each other.
  • The APR is divided by 12 and applied monthly, so a high APR adds up quickly if you carry a balance.

How APR is actually calculated on your monthly bill

Card issuers divide the APR by 12 to get a monthly rate, then explore that rate to your average daily balance during the month. This means the interest compounds — you pay interest on the interest from the previous month if you keep carrying a balance.

Here is a concrete example. Say you have a $2,000 balance on a card with a 21% APR. The monthly rate is 21% divided by 12, which is 1.75% per month. The issuer calculates your average daily balance for the month (which depends on when you made purchases and payments), then multiplies that by 1.75%. If your average daily balance was $2,000, you would owe about $35 in interest that month. The next month, if you still owe $2,000 plus the $35 interest, the interest calculation starts over on the new total.

The exact day the interest is calculated varies by card issuer. Some calculate it daily, some every few days. The statement you receive shows the total interest charged for that billing cycle. You can see the APR and the interest charged on your monthly statement or in your online account.

Why you might have more than one APR on the same card

Most credit cards have at least two different APRs. The purchase APR applies to regular purchases you make with the card. The cash advance APR applies if you use the card to withdraw cash from an ATM, and it is almost always higher than the purchase APR — sometimes 5 to 10 percentage points higher.

Some cards also have a balance transfer APR. A balance transfer is when you move debt from one card to another. The balance transfer APR can be lower than the purchase APR, especially if the card is offering a promotional rate. However, balance transfers usually come with a fee — typically 3% to 5% of the amount transferred — charged upfront.

Your card issuer will tell you all the APRs that explore to your card. You can find them on your statement, in your account online, or in the card agreement you received when you opened the account. If you are considering a new card, the issuer must show you the APR before you submit your process.

Introductory APR offers and what happens after

Some credit cards offer a lower APR for a set period of time, usually 6 to 21 months. This is called an introductory APR or promotional APR. A common offer is 0% APR on purchases for 12 months, which means you pay no interest on purchases made during that period as long as you pay at least the minimum payment each month.

The introductory period has an end date. When it ends, the regular APR takes effect on any remaining balance. If you have a $3,000 balance when the 0% period ends, you will start paying interest on that $3,000 at the regular APR. The card issuer will tell you the regular APR in the offer details before you open the card.

Introductory offers are useful if you plan to pay off a balance before the period ends, or if you need time to pay down debt without interest piling up. They are less useful if you know you will still carry a balance when the period ends, because the interest will then accrue quickly on whatever remains.

How APR compares to other ways of borrowing money

Credit card APRs are usually higher than APRs on other types of loans. A personal loan from a bank might have an APR of 8% to 15%. A car loan might have an APR of 4% to 10%. A mortgage might have an APR of 3% to 7%. Credit cards typically range from 15% to 30%, depending on the card and your credit score.

Credit cards charge higher APRs because they are unsecured debt — the lender has no collateral if you do not pay. A car loan is secured by the car itself, so the lender can repossess it if you stop paying. A mortgage is secured by the house. With a credit card, the issuer has no physical asset to recover, so they charge a higher rate to cover the risk.

This is why carrying a credit card balance is expensive compared to other borrowing. If you need to borrow money, a personal loan or a line of credit from your bank usually costs less than a credit card, even if your credit score is not perfect.

What affects the APR you are offered

Card issuers use your credit score as the main factor in deciding your APR. A credit score is a three-digit number that summarizes your borrowing history — whether you paid bills on time, how much debt you carry, how long you have had credit accounts, and other factors. Scores range from 300 to 850. People with scores above 740 usually get the lowest APRs. People with scores below 620 usually get the highest APRs.

Your credit history also matters. If you have missed payments, have high balances on other cards, or have recently opened many new accounts, you will likely be offered a higher APR. If you have a long history of on-time payments and low balances, you will likely get a lower APR.

The card itself also determines APR. A card designed for people with fair or poor credit will have a higher APR than a card designed for people with excellent credit, even if two people with the same credit score explore for each card. Premium cards with rewards programs often have lower APRs because they are marketed to people with strong credit.

After you open a card, the issuer can raise your APR under certain conditions. They must give you at least 45 days' notice before raising the APR on an existing balance. They can raise the APR on future purchases with less notice. If you miss a payment by 60 days or more, the issuer can raise your APR to a penalty rate, which is usually the highest APR allowed on that card.

How to use APR information to make decisions about credit cards

If you plan to pay off your balance in full each month, the APR does not matter much — you will pay no interest regardless. In this case, focus on other features like rewards, annual fees, and benefits.

If you think you might carry a balance, the APR matters a lot. A lower APR means less interest you will owe. The difference between a 15% APR and a 25% APR is significant. On a $5,000 balance carried for one year, the 15% APR would cost you about $750 in interest, while the 25% APR would cost you about $1,250 — a difference of $500.

When comparing cards, look at the APR you are likely to receive, not just the APR range shown in the offer. The range tells you the lowest and highest APR the issuer might offer, but it does not tell you which one you will get. If your credit score is in the fair range, you will probably receive an APR closer to the high end of the range.

If you already have a balance on another card, a balance transfer card with a low introductory APR can save you money — but only if you pay off the balance before the introductory period ends. Calculate how much you need to pay each month to reach zero before the regular APR kicks in.

Frequently Asked Questions

Does a higher credit limit mean a lower APR?

No. Your credit limit and your APR are decided separately. A higher credit limit does not automatically lower your APR. Both are based on your credit score and history, but the issuer sets them independently. You could have a high credit limit and a high APR, or a low credit limit and a low APR.

Can I negotiate my APR with my credit card company?

Sometimes. If you have a good payment history and your credit score has improved since you opened the card, you can call the issuer and ask if they will lower your APR. They may agree, especially if you have been a customer for a while. There is no harm in asking, but they are not required to say yes.

What happens to my APR if I miss a payment?

If you miss a payment by 30 days, the issuer can raise your APR on future purchases. If you miss a payment by 60 days or more, they can raise your APR to a penalty rate on your existing balance. The penalty rate is usually the highest APR on your card. Once you make on-time payments for six months, the issuer may lower the penalty rate.

Is the APR the same as the interest rate?

APR and interest rate are related but not identical. The interest rate is the percentage charged on your balance. The APR includes the interest rate plus any fees the issuer charges, expressed as a yearly rate. For credit cards, the APR and the interest rate are usually very close because credit cards do not typically charge additional fees built into the APR.

Why does my APR change if I always pay on time?

Card issuers can raise your APR on future purchases without a specific reason, though they must give you at least 45 days' notice. They might raise rates across the board due to market conditions, or they might raise your rate if your credit score drops for any reason. You can always call and ask why your rate changed, and you can request a lower rate if your payment history is strong.