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What is APR?

Read, 3 minutes

Key takeaways

  • APR, or annual percentage rate, represents the yearly interest charged on loans
  • Use APR to help evaluate the potential costs of credit cards
  • Federal consumer law requires lenders to disclose APRs
  • A good credit score can help you get a lower 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. Understanding how banks calculate APRs on credit cards and how they work can help you make more informed decisions. Here’s what you need to know.

How does APR work

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 carry a balance on your card, the agreed-upon interest is added on to your outstanding balance at the end of each billing period.

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How banks calculate APR

Though credit card APRs can vary significantly, almost all start with the U.S. Prime Rate, which is the interest rate financial institutions charge their customers for lending products. Credit card issuers add a small fee on top of that, called a margin, to the prime rate to get the APR. That margin varies depending on the type of card, the cardholder’s credit score and how the card is used. It’s important to understand that economic conditions can cause the prime rate to fluctuate. That means APRs tied to the prime can change as well. Some banks offer fixed-rate credit cards, so the APR won’t fluctuate with changes to an index rate.

Did you know?

In most cases, lenders cannot change the APR for the first 12 months you have the card but be sure to read the fine print before opening a new account. Exceptions may include promotional or variable rates or if the card’s terms and conditions are violated.

How to calculate your credit card interest

The formula to determine how much interest you owe on your outstanding balance varies by bank, but generally works like this: Let’s say your card’s APR is 17 percent, and your average daily balance during a 25-day billing cycle is $2,000.

Find your daily rate by dividing the Annual Percentage Rate by 365 days.


Your card’s APR




Your daily rate

Multiply the daily rate by the days in the billing cycle and the balance.


Your card’s daily rate


Days in the billing cycle


Your balance


Your monthly interest charge

Keep in mind some accounts have multiple APRs, so this calculation may be applied for each one. Check your monthly statement and cardholder agreement for additional information on how each APR is applied.

Types of APR explained

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


The rate applied to credit card purchases.

Cash advance

The rate for borrowing cash from your credit card. It generally is higher than for purchases. There may be a different APR for checks or certain types of cash advances, and there’s no grace period.


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

Introductory or promotional

Typically, a very low rate offered for a limited time. It can apply to specific transactions, as well as balance transfers, cash advances or any combination.

How to get a lower interest rate on a credit card

The most important thing you can do is maintain a good credit score. Many credit cards offer an APR range—13.99 percent to 23.99 percent, for example. People with better credit histories tend to get the lowest rates, while people with lower credit scores typically pay higher rates.

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.

Close Disclaimer

The material provided on this website is for informational use only and is not intended for financial, tax 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 and tax advisor when making decisions regarding your financial situation.

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