What is an APR?

You may have seen the term APR, or annual percentage rate, used in reference to everything from mortgages and auto loans to credit cards. In this piece, we look at credit card APRs—which you’ve probably seen listed on your monthly statements. Knowing what an APR is, how it’s calculated and how it’s applied can help you make more informed credit card decisions.

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About APR

Technically speaking, APR (annual percentage rate) is a numeric representation of your interest rate. When deciding between credit cards, APR can help you compare how expensive a transaction will be on each one. It’s helpful to consider two main things about how APR works: how it’s applied and how it’s set.

Applying APR

Generally, credit card companies offer a grace period for new purchases. If you only make purchases and pay off your ending balance each month by the due date, you pay just the amount you owe with no interest. However, if you opt to carry a balance on your card, you pay the agreed-upon interest on your outstanding balance.

Setting the APR

Many variable interest rates start by using an index, such as the U.S. Prime Rate, and then add a margin. The result is the APR. Here’s an example of how the rate is set:

The U.S Prime Rate, as published in the Wall Street journal + The margin the bank charges = APR

Please note that variable rates can change if the index changes. Additionally, some banks offer a non-variable APR as well.

Calculating what you owe

Banks use a formula to determine how much interest you pay on your outstanding balance. They calculate it using a daily or monthly periodic rate, depending on the card.

APR ÷ 365=DPR (Daily Periodic Rate)

(DPR x Days in billing period) x Balance subject to interest rate = % Interest charged

Keep in mind some accounts have multiple APRs, so this calculation may be applied for each one. The statement gives you more information about how to calculate the Balance Subject to Interest Rate.

Types of APR

There are different APRs based on how you use your credit card. When you’re selecting a credit card, it’s a good idea to consider these rates in addition to your credit needs.

Purchase APR

The rate applied to credit card purchases.

Cash advance APR

The cost of borrowing cash from your credit card tends to be higher. There may be a different APR for balance transfers, checks or certain types of cash advances. No grace periods.

Penalty APR

Usually the highest APR. It may also be applied to certain balances when you violate the card terms and conditions like failing to make payments on time.

Introductory APR

(or promotional APR) Features a lower APR for limited time period. It can apply to specific transactions as well as balance transfers, cash advances or any combination.

APR and the cardholder

Before you get any credit card, keep in mind:

  • The APR can help you evaluate all offers and promotion.
  • Lenders cannot change the APR for the first 12 months. The only time an APR can change in that period is if it’s a promotional or variable rate, or if the terms and conditions are violated.
  • Consumers should review terms and conditions, including the APR, before using their cards.
  • In most circumstances, companies must give 45 days notice of any changes to the APR.

 

Remember, while APR is important, it’s just one of the factors to take into account when choosing a credit card. For more on how to go about comparing different card options, check out our overview on finding the right credit card for you.

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The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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