Understanding Credit Card APRs

Learn about credit card annual percentage rates (APRs).

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If you are shopping for a credit card, or have a credit card and are wondering if you can get a better deal, you should understand what an APR is. The APR is usually the single most important factor in how much you will pay to use your credit card if you don’t pay the balance off in full each month.

(To learn more about credit card terms, shopping for credit cards, and using credit cards wisely, visit our Banking and Credit Cards topic area.)

What Is an APR? 

The annual percentage rate (APR) is the percentage you will pay in interest each year (assuming you carry a balance). Each month, if you haven't paid the balance in full by the due date, the credit card company applies the APR to the account balance to compute the finance charge for that month. The finance charge is the dollar amount you pay to use the credit.

What Is Included In the Account Balance? 

Since the APR is applied towards the total account balance, it's important to know what that is. It can be more than just the amount you charged that month. For example, the account balance may include purchases, previous months’ unpaid balances, transaction charges, and other fees.

Credit Card APRs Don't Include Other Fees

Unlike mortgage APRs, which wrap in fees so that the APR reflects the total cost of credit, credit card APRs don’t usually include fees. This is because the card company doesn’t know what fees you will incur ahead of time, so it’s impossible to reflect those fees in the APR. Some credit cards, however, will include the annual fee in the APR.

Keep this in mind when you are comparing APRs between credit cards. You’ll have to also look at the various fees that you might incur (such as late fees, cash advance fees, balance transfer fees, and the like) to determine if the credit card is a good deal or not.

Multiple APRs Per Card

A credit card may have several APRs. For example, one may apply to purchases, one to cash advances, and another to balance transfers. The APRs may be tied to different levels of outstanding balance; for example, the company may charge 14.9% on balances up to $500 and 17% on larger balances.

Fixed v. Adjustable APRs

APRs also may be fixed or adjustable. An adjustable APR changes from time to time, and usually is tied to another interest rate, such as the prime rate or the Treasury Bill rate. The APR changes automatically when the other rate changes. A fixed APR may change at the end of the period of time for which it was fixed. If the credit card offer did not put a time limit on the fixed rate, you should be able to keep that rate while you keep the card. (Most offers do put a time limit on fixed rates, saying they will change to a variable rate after a certain period of time.)

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