What APR Means on a Credit Card
APR stands for Annual Percentage Rate. On a credit card, it is the yearly interest rate the issuer charges when you carry a balance past the due date. If you pay in full each month, the APR usually has no cost. If you do not, it determines how much extra you will owe.
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How Credit Card APR Works
Most cards use a variable rate tied to a benchmark index, such as the prime rate. The issuer adds a margin to that index to set your APR. Interest is typically calculated daily on the average daily balance during the billing cycle and compounds over time. A grace period often applies to new purchases if you pay the full statement balance by the due date, but that protection disappears once you carry a balance.
Types of APR
- Purchase APR: the rate for regular transactions.
- Balance Transfer APR: the rate applied to transferred debt.
- Cash Advance APR: often higher, with fees, and usually no grace period.
- Penalty APR: a higher rate triggered by missed payments.
What Determines Your APR
Your credit profile, including score and history, is the biggest factor. Issuers also look at the prime rate, market conditions, and the card's reward structure. Rewards cards often carry higher APRs than basic cards because of the added benefits. Some cards offer a 0% introductory APR for a set period, after which the standard rate applies.
Why APR Matters
A higher APR means carrying a balance gets expensive faster. A lower APR reduces interest costs and can help you pay down debt more quickly. Comparing APRs is useful when choosing a card, especially if you plan to revolve a balance. However, if you pay in full each month, the APR is less relevant than other features like fees and rewards.