Financial Education

What is APR in credit cards: understand how it works

Are you interested in learning more about the APR (annual percentage rate), its benefits and risks, as well as how to avoid it? Take a closer look at what this term means for you.

Advertisement

What you should know about APR in credit cards

Businessperson's Hand Calculating Bill With Calculator
Find out what APR is in credit cards! Source: Adobe Stock.

You’ve probably heard of APR while reading about a credit card service. But, do you know what it stands for?

APR (Annual Percentage Rate) is one of the most important terms to understand when it comes to credit cards. 

This number serves to calculate how much interest you’ll owe on your balance each year, so it’s essential to know what it means and how to avoid paying too much in interest.

First Progress logo

How to apply: First Progress Platinum Prestige

Looking for a credit card for bad credit? Read more to learn about the First Progress Platinum Prestige Mastercard Secured Card application!

In this post, we’ll break down what APR is and how you can make sure you’re getting the best deal on your credit card. Let’s start!

What does APR mean and how does it affect you?

Wooden blocks with percentage sign and arrow up, financial growt
Learn more about how APRs affect you! Source: Adobe Stock.

You might be wondering what APR is and how it can impact your finances. Here’s everything you need to know about this important term in reference contracts, loans, or credit cards!

These initials stand for Annual Percentage Rate and represent the interest rate you pay on a loan on an annual basis – including credit cards, mortgages, personal loans, and more. 

In other words, it’s the cost of borrowing money for one year. Your APR can be fixed or variable:

  • Fixed APR  means the annual percentage rate will stay the same for the duration of your loan
  • Variable APR  means that the annual percentage rate can change over time. 

Generally speaking, variable APRs are lower than fixed APRs at the outset of a loan. However, it can increase over time.

APRs are important to consider because they can have a significant impact on your monthly payments and the final amount you pay back on your loan. 

For example, let’s say you’re taking out a $10,000 loan with a 4% APR. Over the course of five years, you would end up paying $400 in interest. 

However, if your APR was 10%, you would end up paying $1,000 in interest – that’s $600 more! 

Moreover, let’s have a look at three important types of APR that might come together in your credit card:

  • APR for purchases: rate applied every time you use your credit card for purchases.
  • APR for cash advance: it usually rates higher interest than purchase. So, you will have to pay more if you withdraw cash from an ATM or use convenience checks.
  • APR for penalties: The highest one, in most cases. For example, it applies to balances if you break the card conditions or fail to pay on time.
  • Introductory or promotional APR: it is a lower promotional interest rate offered by some credit cards for some time if you start a service with them.

As you can see, APRs can significantly impact how much you end up paying back on your loan. Then when you’re shopping around for a loan, it’s crucial to compare APRs to get the best deal possible.

How is APR calculated?

APRs take into account not only the interest rate charged on loan ( that includes credit limit) but also any fees that are required to obtain the loan. 

This makes it a more accurate measure of the true cost of borrowing than simply looking at the interest rate. 

To calculate APR, divide the total amount of interest and fees paid over the course of a year by the original loan amount. This will give you the percentage. 

For example, if your credit card limit is $100 at an interest rate of 10%, and you pay $10 in fees during a year, your APR would be 20%.

smiling student using laptop

What is a private loan for students?

Paying for college education is not easy, but you can count with a private student loan to help you. Is it a good idea? This content will clarify this question.

 

Benefits of a low APR credit card

Pretty young woman shopping online with credit card and laptop w
A low APR credit card can be an excellent choice! Source: Adobe Stock.

As you might know by now, APR, or Annual Percentage Rate, is the percentage of interest that credit cards charge per year on your credit card balance.

Most credit cards have an annual rate between 13% and 20%. So a low APR credit card is a credit card with the lower end of this range, typically around 13%. 

There are several benefits to having a low APR credit card. First, it can help you save money on interest charges. 

If you carry a balance on your credit card from month to month, then a lower APR will make you pay less in interest in the future. 

Second, a lower rate can help you pay down your debt faster. If you’re paying more of your monthly payment towards the principal balance rather than towards interest, you might pay off your debt in a shorter time. 

Finally, it can help you build up your credit score. When you have a lower APR, it’s easier to keep your utilization rate low, which is one of the main factors determining your credit score. 

That said, if you’re looking for a new credit card, consider getting one with a low APR. It could save you money and help you improve your credit score.

Multiple personalized credit card offers

Applying won't hurt your credit score

You will be redirected to another website

How to avoid paying high APR rates?

APRs are the rate charged on credit cards and other loans, and they can have a major impact on your financial health. 

The good news is there are some simple things you can do to avoid paying high APR rates.

1. Get information

First things first, understand what APR is and how it works. As you know, it is the interest rate for credit card balances and other loans; and you can see it percentage of the outstanding balance. 

For example, if your credit card has an APR of 20%, that means you will be charged 20% interest on any unpaid balances.

2. Study the best rates offered by credit cards

The next step is to look for the best rates. Credit card companies compete for customers, so it pays to shop around for the best deal. 

You can check online comparison sites or contact different banks and credit card companies directly to compare rates.

3. Read the bottom line

Once you have found a few cards with competitive rates, it’s important to read the fine print before applying.

Some cards come with hidden fees or terms that can make them much less attractive than they first appear. 

Be sure to check for balance transfer fees, annual fees, and late payment penalties before deciding which card is right for you.

Now that you understand APR, it’s important to be proactive in avoiding it. 

Then, always check your credit card statement for any added fees and ensure you are only paying the interest rate on the money you borrowed. 

Also, keep an eye out for introductory rates and promotional offers—they can help keep your overall costs down. 

And if you have questions about APR or anything related to your credit card, call the credit card issuer.

And if you want to learn about high-yield savings accounts to save money for anything you need, check out our post below!

A woman putting coins into piggy bank for saving money concept

What is a high-yield savings account

Are you looking for a high-yield savings account? If so, you've come to the right place. In this comprehensive guide, we'll show you what a high-yield savings account is.

Trending Topics

content

Milestone Mastercard – Unsecured For Less Than Perfect Credit application

How to apply for a Milestone Mastercard - Unsecured For Less Than Perfect Credit? We'll show you! Qualify with poor credit! Read on!

Keep Reading
content

Bank of America® Travel Rewards review: Perfect for Travelers

Get a complete Bank of America® Travel Rewards review to find out its travel perks - 0% intro APR and no annual fee! Read on and learn more!

Keep Reading
content

Learn to apply easily for CarLoans.com

Have you been thinking of buying a new car? Then learn how to apply for CarLoans.com! Get approved in 2 minutes! Keep reading!

Keep Reading

You may also like

content

Mission Money card application: how does it work?

Download the Mission Lane app, open your account and ask for your Mission Money debit card. You'll pay no fees to use it everywhere.

Keep Reading
content

Credit card interest rates are rising, start paying it down now!

If you have high-interest credit card debt, now is the time for a plan of action. Read on for information on how you can pay it off.

Keep Reading
content

Application for the BOOST Platinum Card

The application process for the Boost Platinum Card is easy, and you won't have to worry about credit checks!

Keep Reading