What is Annual Percentage Rate in credit card?

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The annual percentage rate (APR) determines the amount of interest applied to your balance during a billing cycle. APR is applied to all credit cards.

A credit card's interest rates are calculated yearly and APR signifies the interest a cardholder pays towards a transaction while using their credit card.

What is a good APR for a credit card?

Simply put, APR (Annual Percentage Rate) is the cost of using a credit card to borrow money. It is the annual interest rate you will be charged if you carry a balance on your card, and this rate can vary from one card to another. For instance, you might have one card with an APR of 9.99% and another with an APR of 14.99%. Credit card companies consider your credit score when determining your APR, so having a higher credit score usually means you will get a lower interest rate.

Credit cards often come with a variable APR, which means that your interest rate can change over time. This variable APR is linked to a benchmark, like the federal prime rate, which is the lowest rate at which banks lend money. If the prime rate goes up, your card's APR will also increase, and if the prime rate goes down, your card's APR will decrease.

How does APR work in credit cards?

APR, or Annual Percentage Rate, represents the cost of borrowing on a credit card. It includes the interest rate and additional fees, giving a comprehensive measure of the overall cost for the cardholder. APR is expressed as a percentage and represents the annual cost of carrying a balance on the card. Consumers must understand APR, as it affects the interest charged on outstanding balances. A lower APR is preferable, as it means lower overall costs for borrowing on the credit card. APR can vary based on the type of transaction and the creditworthiness of the cardholder.

Types of credit card APR

  • Purchase APR:
    The Purchase APR, or Annual Percentage Rate, is the interest rate you will pay on any outstanding balances from purchases made using your credit card. It is the standard rate applied to everyday shopping and expenses.
  • Cash Advance APR:
    The Cash Advance APR applies when you use your credit card to withdraw cash from an ATM or obtain cash-like transactions. It is often higher than the Purchase APR and may involve additional fees, making it an expensive way to access funds.
  • Penalty APR:
    The Penalty APR is a significantly higher interest rate that credit card issuers impose as a punishment for late payments or other violations of the cardholder agreement. It is essential to avoid triggering this rate by making on-time payments and adhering to the card's terms and conditions.
  • Introductory APR:
    An Introductory APR is a temporary, often low or even 0% interest rate offered by credit card companies for an initial period, typically for balance transfers or new purchases. After the introductory period ends, the rate reverts to the standard Purchase APR.
  • Balance Transfer APR:
    The Balance Transfer APR is the interest rate applied to the amount you transfer from one credit card to another. It is often lower than the Purchase APR and can help you consolidate debt or reduce interest costs, but it is crucial to be aware of any associated fees or time limitations.

Tips to reduce APR

Reducing your Annual Percentage Rate (APR) on credit cards can significantly save you money on interest charges and help you manage your finances more effectively. Here are some tips to help you lower your APR:

  • Improve your credit score:
    A higher credit score can make you more appealing to lenders, potentially leading to a lower APR. Pay your bills on time, reduce outstanding debt, and maintain a clean credit history.

  • Negotiate with your card issuer:
    Do not hesitate to call your credit card company and ask for a lower APR, especially if you have been a loyal and responsible customer. They might be willing to work with you, particularly if you mention competing offers with better rates.

  • Pay on time and in full:
    Make consistent, on-time payments to your credit card. Not only will this improve your creditworthiness, but it will also prevent you from incurring late payment fees and triggering penalty APRs.

  • Reduce credit card debt:
    Lower your credit card balances by paying more than the minimum amount due each month. Reducing your outstanding debt can lead to a lower APR and, ultimately, financial freedom.

  • Understand your card agreement:
    Read and understand the terms and conditions of your credit card agreement. Knowing the factors that affect your APR can help you make informed decisions and avoid surprises.

  • Avoid triggering penalty APR:
    Steer clear of late payments, over-limit charges, and other violations that can trigger a penalty APR. These rates are substantially higher and can be challenging to reverse.

Remember that reducing your APR may not be an immediate process, and it often requires a combination of financial responsibility, negotiation, and possibly transitioning to more favourable credit card accounts. Each step you take toward a lower APR contributes to healthier financial stability.

How is credit card APR calculated?

The Annual Percentage Rate (APR) on a credit card is a crucial factor that determines the cost of borrowing money through that card. Calculating the APR is not always straightforward due to its various components, but it's essential to understand how it works:

  • Interest rate and fees: The first step in calculating the APR is to determine the interest rate charged by the credit card issuer for carrying a balance. This interest rate is often referred to as the nominal or stated interest rate.
  • Frequency of interest: Credit cards typically calculate interest on a daily or monthly basis. The more frequently interest is applied, the higher the effective APR will be.
  • Annualising the rate: To annualize the interest rate, you need to account for the frequency of compounding. For example, if your card charges 1% interest monthly, you would multiply it by 12 to get the annual rate (12% in this case).
  • Including fees: Some credit cards may also have annual fees or other charges. These should be factored into the APR calculation. For example, if you have a $100 annual fee on a card with a 12% interest rate, your APR would be higher than 12%.
  • Grace period: If your credit card offers a grace period, where no interest is charged if you pay the full balance each month, the APR calculation excludes this period.
  • Variable rates: For cards with variable APRs, the rate is often tied to a benchmark index, like the prime rate. As the index changes, the APR on the card can change accordingly.
  • Penalty APR: If you incur late fees or violate the card agreement, a penalty APR may be applied, which can be significantly higher than the regular APR.

Difference between credit card APR and interest rates

The key distinction between credit card APR and interest rates lies in their scope. Interest rates refer specifically to the cost of borrowing money, often expressed as a percentage. They represent the fee charged for carrying a balance on your credit card. On the other hand, the Annual Percentage Rate (APR) encompasses not only the interest rate but also additional fees and costs associated with the card, such as annual fees, balance transfer fees, and late payment charges. The APR provides a more comprehensive picture of the total cost of using a credit card, making it a more accurate measure of the financial impact of credit card use.


APR is a critical factor to consider when choosing a credit card. Understanding what it is, how it is calculated, and how it affects you can help you make informed decisions about your finances. Exploring various options, opting for the card with the most favourable interest rate and minimal fees, reading the terms and conditions, aiming to settle the credit card balance entirely monthly, and refraining from carrying balances are key practices to safeguard your financial well-being.

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Frequently asked questions

What is 24% APR on a credit card?

A 24% APR on a credit card means that, on an annual basis, you will be charged an interest rate of 24% on any outstanding balances you carry. It is the cost of borrowing money through the card, and if you owe Rs. 1,000, for instance, you would pay Rs. 240 in interest over a year.

What is a good APR for a credit card?

A good APR for a credit card is typically in the lower range, ideally under 15%. The lower the APR, the less interest you will pay on your balances. However, the specific "good" APR can vary based on your credit history, the card's features, and the current market rates.

How do I calculate APR?

To calculate APR, you need to consider the nominal interest rate, the frequency of compounding, and any additional fees or costs. The formula typically involves annualising the interest rate and factoring in fees to determine the comprehensive cost of borrowing.

What is the difference between annual fee and annual percentage rate?

The annual fee and annual percentage rate (APR) are different elements of a credit card's cost. An annual fee is a set amount you pay each year for card membership, while the APR is the interest rate applied to your outstanding balances. The annual fee is a fixed cost, whereas the APR is a variable cost tied to your card's interest rate, making it more expensive if you carry a balance.

Is APR on credit cards charged monthly?

The Annual Percentage Rate (APR) on credit cards is an annual rate, but it may be applied to your outstanding balance monthly. This means that the higher your APR, the more interest you will accrue on your outstanding balance each month.

How to avoid APR fees on credit cards?

To avoid APR fees on credit cards, it is important to pay off your balance in full every month. Making on-time payments in full helps you avoid carrying a balance, thus avoiding interest charges. You should also consider choosing credit cards with lower interest rates or offers of 0% APR for an introductory period.

Why is credit card APR so high?

Credit card APR is high because credit cards are unsecured loans, meaning they are not backed by collateral. Credit cards also carry a higher risk of default as customers may struggle to pay their bills, leading to higher rates to ensure profitability for the lender.

What are credit card APR rates?

Credit card APR rates vary depending on the lender and the applicant's creditworthiness. The average credit card APR in the UK is about 22.9%, but it can range anywhere from 0% to over 40%. It is important to understand the APR before applying for a credit card and compare different options to find the one with the lowest rates and fees.

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