The APR is the annual percentage rate of interest charged to a credit card holder based on the total balance or a portion of the balance if the amount is not paid in full before the due date.
APR can be complex for consumers to grasp because it changes depending on different types of transactions.
Fixed vs. Variable Interest Rates
There are two basic types of interest rates – fixed and variable. A fixed interest rate remains the same and can only change in certain circumstances. A credit card issuer can change the rate if an advance notice of the change is sent to the cardholder.
Variable interest rates can change more often because they’re based on another interest rate, specifically the prime rate. The prime rate is the interest rate banks charge to their most creditworthy customers. To get the prime rate, you must have excellent credit. The prime rate, as reported by The Wall Street Journal’s bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates. Many variable interest rate credit cards base their rates on the U.S. prime rate.
Whenever the underlying interest rate changes, the variable interest rate also changes and credit card issuers don’t have to send notice of the change.
Facts about credit card APR
1. Grace Period
Most credit cards have a grace period during which you can pay your credit card balance in full and you won’t be charged interest on the balance. How interest is charged is any balance left beyond the grace period is subject to interest.
2. Several APRs on one credit card
It is possible for one credit card to have multiple APRs. The multiple APRs are charged for various types of transactions. There could be a special offer “introductory” rate for new card holders or a “promotional” rate for consumers who transfer their balance from one credit card to another.
3. Introductory APR
An introductory rate can last from 6 to 12 months. These rates are usually teaser rates that credit card companies use to lure you. The introductory rate may apply to regular purchases or balance transfers. Once the introductory rate expires, the regular APR is applied to the balance.
4. Purchases or Regular APR
The purchases or regular APR is the interest rate charged on the balance for any purchases made with the credit card. If you pay your account in full by the due date, you will not be charged any interest.
5. Balance Transfer APR
A balance transfer APR is a special APR. It is often lower than the purchases or regular interest rate and only applies to the balance moved from one credit card to a different credit card. A balance transfer rate can be as low as 0%. The credit card companies can go that low because they assume consumers will continue to accumulate additional debt at the regular APR.
Balance transfers may look attractive but they have the potential to cost you more than a regular APR. There may be an upfront fee for the balance transfer and the balance transfer is usually limited to a certain time-frame. Balance transfers come with an expiration date, after which a higher APR rate will apply to any outstanding balance.
6. Cash Advance APR
This APR is often a higher APR. Whenever cash is withdrawn using your credit card, whether it be at an ATM or you use a convenience check, a cash advance APR will be applied to your account.
7. Default or Penalty APR
If you make a late payment by 60 or more days, a default or penalty APR will apply. The default APR is the highest interest rate. The default APR can also be assessed if you exceed your credit limit and even if your payment check is returned for non-sufficient funds. Credit card issuers are required to review your account activity after 6 months and lower your APR if you have made on-time payments.
8. No APR
Pay the balance in full and on time every month and eliminate the APR. If you don’t owe a balance on your credit card then you do not have to pay any interest.
9. APR does not include fees
The APR is only one element of the cost of a credit card. Generally credit cards come with other fees as well. For instance:
- Cash advance fees
- Over-limit fees
- Finance charge
- Balance transfer fees
- Application fees
- Annual fees
- Inactivity fees
- Paper statement fees
- Reward redemption fees
- Payment protection fees
- Reward recovery fees
- Foreign transaction fees
As you can see credit cards are not one dimensional. It is important to understand what you are agreeing to when applying for a credit card and accepting the terms. Before you sign up read the credit card disclosures in order to make an informed decision.