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What is APR?

Read, 3 minutes

Key takeaways

  • APR, or annual percentage rate, represents the annual cost of borrowing money, including fees, expressed as a percentage; for credit cards, APR is generally just interest
  • Understanding a credit card’s APRs, including how they are calculated, can help you compare offers and find the right card for you
  • A good credit score may help you get a lower APR on a new credit card

You may have seen the term APR, or annual percentage rate, used in reference to everything from mortgages and auto loans to credit cards. Understanding how banks calculate APRs and how they work can help you make more informed credit card decisions. Here’s what you need to know.

How does an APR work?

APR stands for Annual Percentage Rate and it represents the yearly cost of borrowing money.  It includes the interest rate that applies to your account (credit card, mortgage, line of credit, etc.) plus other fees related to that account.

Generally, credit card companies won’t charge interest on purchases if you always pay your entire outstanding balance by the payment due date. However, if you carry a balance, each purchase will usually begin accruing interest on the day the transaction is made and is added to your outstanding balance at the end of each billing period.

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How to calculate interest charges on a credit card

The formula to determine how much interest you owe on your outstanding balance may vary by creditor, but generally works like this:

Let’s say your credit card’s APR for purchases is 17 percent, and your average daily balance for purchases during a 25-day billing cycle is $2,000.

First, determine your daily periodic rate by dividing the APR by 365 days.


Card’s APR




Daily periodic rate

Next, multiply the purchase balance by the daily periodic rate and that result is then multiplied by the number of days in the billing cycle.


Average daily balance


Periodic daily rate


Days in the billing cycle


Monthly interest charge

So, if these numbers applied to your credit card account, you would owe $23.30 in monthly interest.

Keep in mind that your account may have multiple APRs (one for purchases, one for cash advances and one for balance transfers). Check your monthly statement and cardholder agreement for additional information on how each APR is applied.

Types of APR explained

For credit cards, the APR is generally just the interest rate that applies to your account. Credit cards may have either fixed or variable APRs and will usually have different APRs that apply to different types of transactions (purchases, balance transfers, cash advances) or when there is a default under the terms of the credit card agreement (penalty). There may also be introductory or promotional APRs which are limited offers that will apply to certain transactions over a specific period of time (for example, 0% APR on purchases for 12 months).

Here’s a look at some of these terms:

Fixed APR

A rate that isn’t variable – meaning that it won’t increase or decrease based on changes to an underlying index rate, such as the U.S. Prime Rate, but that doesn’t mean that the rate will never change. Certain events, like late payments or violating the terms of your credit card agreement, may cause that rate to change.

Variable APR

A rate that will increase or decrease based on the movement of an index rate, such as the U.S. Prime Rate. For credit card accounts, the rate will include an index plus some type of margin or percentage added to the index.

Purchase APR

The rate that will apply to credit card purchases.

Cash advance APR

The rate for borrowing cash from a credit card, which is generally a higher rate than the rate for purchases.

Balance Transfer APR

The rate for transferring a balance from one account to another.

Penalty APR

The rate applied to balances on an account, as a result of late payments or violating certain terms of the credit card agreement.

Introductory or Promotional APR

Typically, a lower APR than the standard APR on an account, which is offered for a limited time (for example, six months or a year) and will apply to certain transactions (for example, purchases or balance transfers).

How to get a lower interest rate on a credit card

One of the most important things you can do is maintain a good credit score. Credit card issuers take into consideration many different factors, including your credit score, in evaluating an application and determining the APRs that will apply. Paying your bills on time, not letting your accounts get close to their maximum credit limits, and monitoring your credit reports are just some of the ways you can help maintain or improve your credit score.

Generally, people with better credit scores tend to get better rates than people with lower credit scores.

Remember, while APR is important, it’s just one of the factors to take into account when choosing a credit card that’s right 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 Corporation and/or its affiliates 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 management. ©2024 Bank of America Corporation.

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