A credit card’s annual percentage rate (APR) represents the cost of borrowing money from a lender, typically stated as an annual interest rate. Thus, the APR on a credit card is an important number to know before charging a purchase — especially if you plan on carrying a balance on your credit card account.
In this article, we’ll cover what APR means on a credit card, as well as when it applies and how it’s determined. We’ll also dive into the different types of credit card APR you may encounter.
What Is a Credit Card’s APR?
A credit card’s APR refers to the annualized cost of using your credit card to borrow funds. When an individual charges a purchase from a merchant that accepts credit card payments, they’re actually borrowing money from the credit card issuer. The credit card issuer pays the merchant, and the cardholder pays the credit card issuer based on the terms of their credit card agreement.
Depending on the type of transaction and when it’s paid back, some purchases may be subject to interest given how credit cards work. For instance, the purchase APR applies to any balance remaining after the statement due date. Interest is determined based on the credit card’s APR.
How Is APR Determined?
Because actual interest charges are calculated based on the credit card APR, it’s a good idea to get familiar with how APR is determined.
An integral part of what a credit card is, credit card APR is not a set rate that’s the same for every credit card and credit card holder. Rather, the interest rate on a credit card will depend on a number of factors, such as the cardholder’s credit score, what type of credit card it is (for example, whether it’s a rewards card or a card for people with low credit ratings), how the card is being used, and the current economic conditions.
In the U.S., the average credit card interest rate was 16.44%, per the most recent data released by the Federal Reserve. That being said, there is a great deal of variance in APRs.
What’s a good APR for a credit card, you might ask? One that results in the lowest interest charges — which means the lower the better.
Types of Credit Card APR
The concept of charging interest on borrowed money is not unique to credit cards. From car loans to mortgages, all types of loans have an interest rate attached. But one way credit card APR differs from the interest rates on some other lending products is that the interest charges on credit card transactions may vary depending on the type of transaction an individual makes with their card.
Understanding the different types of credit card APRs (and, in some cases, how they are applied) can help an individual better anticipate actual interest costs before they apply for a credit card. Here are some common types of APR on credit card purchases.
Introductory APR or Promotional APR
It’s not uncommon to see credit card offers touting no interest — though it’s important to note that 0% APR is not usually a permanent credit card feature. If a credit card offers an “introductory” or “promotional” APR, that generally means that the rate offered is only applied for a limited time. After that, the interest reverts to another (typically higher) APR.
How interest is applied to an introductory or promotional APR period will depend on the specific wording of the offer. For example, if a credit card offers a zero-interest promotional period (“0% APR for X months”), that means no interest is charged during that specified offer period. Once the offer period ends and the APR reverts to the standard rate, interest is only charged on any outstanding balances from the date the promotional period ended. (Other terms, such as always making the credit card minimum payment by the due date, may also apply in order for the promotional rate to be valid.)
But a promotional APR that defers interest doesn’t work in quite the same way. With deferred interest, the promotional or introductory rate only applies if the balance is paid in full by the end of the offer period. But interest on any remaining balance will be calculated based on the date of purchase, not the end of the offer period. That’s why it’s important to be mindful of whether your spending is within your budget, even if it is technically within your credit card limit.
While the specifics of a promotional or introductory APR offer should be clearly spelled out in the terms and conditions, one way to spot such an offer is to look out for conditions — for example, “no interest if paid in full within 12 months.”
Cash Advance APR
Whether an individual wants to pay taxes with a credit card, reimburse a friend, or access money for another purpose, it may be possible to draw cash from a credit card at an ATM or using convenience checks. However, cash advances are often subject to a different (usually higher) APR, and may begin to accrue interest starting from the transaction date.
Balance Transfer APR
Some credit cards may offer a lower APR rate for balances transferred from higher APR cards, which can be helpful if you’re looking to pay off high-interest debt. The balance transfer APR will usually only apply on a promotional or temporary basis.
Purchase APR
This is the standard APR that is applied to most regular purchases charged to a credit card. It applies on any balance that remains after the statement due date. This is why, even if you’re disputing a credit card charge, for instance, it’s smart to pay off as much of your balance as you can to avoid interest accruing.
Penalty APR
Just as it sounds, penalty APR is a penalty fee. It’s higher than the regular purchase APR and kicks in as a result of payments that are more than 60 days late. The terms associated with penalty APR are disclosed in the credit card agreement.
The Takeaway
While credit cards can be a useful tool for managing cash flow (and even earning rewards and perks), it’s important to understand the costs involved. This includes understanding how credit card interest works and how credit card APR applies to credit card balances. As you can see, credit card APR can vary widely, and what a credit card’s APR is can depend on which type of APR applies to the transaction.
The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1
FAQ
What does the APR not include?
Although the interest rate and when it’s applied may vary depending on the type of transaction, APR applies to any funds that are drawn from one’s credit card.
Do you pay credit card APR monthly?
Whether APR is charged depends on the type of transaction and when it’s paid off. For regular purchases, there is no credit card APR at all so long as the balance is paid in full by the statement due date.
Is APR based on current balance?
Like other types of interest, APR is a percentage of the balance owed on a credit card. How APR is applied to various types of purchases and when interest begins to accrue typically depends on the type of transaction and is detailed in the credit card agreement. Most regular balances only begin to accrue interest if any amount is remaining after the statement due date.
What happens if you pay more than the minimum balance on your credit card each month?
Purchase APR typically is applied to any balance remaining after the statement due date. By paying more than the minimum balance, an individual will reduce the amount of funds that are subject to interest.
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