A credit card APR, or Annual Percentage Rate, is the yearly interest rate you'll be charged if you carry a balance on your credit card from month to month.
Understanding Credit Card APR
The APR represents the cost of borrowing money on your credit card over a year. It's expressed as a percentage and can vary widely depending on factors such as your credit score, the type of card, and prevailing interest rates.
Key Features of APR:
- Annual Rate: APR is an annual rate, even though interest is usually calculated and charged monthly.
- Carrying a Balance: You only pay APR if you don't pay your entire credit card balance by the due date each month. If you pay your balance in full, you avoid paying interest.
- Variable vs. Fixed:
- Variable APRs are tied to an index, such as the prime rate, and will fluctuate as that index changes. Most credit cards have variable APRs.
- Fixed APRs remain constant, though the card issuer can still change them with advance notice.
Types of APRs
Credit cards often have different APRs for different types of transactions:
- Purchase APR: The rate applied to purchases you make with your card.
- Cash Advance APR: The rate applied to cash advances, which are typically higher than purchase APRs.
- Balance Transfer APR: The rate applied to balances you transfer from another credit card.
- Penalty APR: A higher rate that may be applied if you make a late payment or violate the terms of your credit card agreement.
How APR Affects You
The APR significantly impacts the total cost of using your credit card. A higher APR means you'll pay more in interest over time if you carry a balance. For example:
If you have a \$1,000 balance on a credit card with a 15% APR, and you only make minimum payments, it will take you many years to pay off the balance, and you will pay hundreds of dollars in interest. Conversely, a lower APR will save you money on interest charges.
How to Minimize APR Costs
- Pay Your Balance in Full: The best way to avoid paying interest is to pay your credit card balance in full each month by the due date.
- Shop for Low APR Cards: If you anticipate carrying a balance, look for credit cards with low APRs.
- Negotiate with Your Issuer: You may be able to negotiate a lower APR with your credit card issuer, especially if you have a good credit history.
