As a credit cardholder, it's likely that you've come across the term 'annual percentage rate' (APR). Even if you have a rough idea of how APR works and what it is, you may still have questions about how it affects you personally — especially your finances related to your credit card accounts.
This guide is designed to help demystify credit card APRs and how they work. First, let's discuss what an APR is; then, we'll go over how companies calculate interest on your account and how you can avoid paying interest to keep more money in your pocket.
What is APR on a credit card?
APR represents the yearly cost you pay to borrow money from a lender or credit card issuer.
With installment loans, like personal loans or auto loans, APR includes both the interest and fees that a lender may charge. However, credit card APR does not include annual fees. In the case of credit cards, APR just stands for the yearly interest rate.
What are the different types of APR?
The most common type of credit card APR is called:
- Purchase APR: The interest rate applied to purchases made with your card. This rate can be fixed or variable, meaning an APR that's static over time (fixed) or one that can change according to the prime rate, which is a metric that banks use to determine overall interest rates.
There are a few other types of APR you might come across, too:
- Introductory APR: This is a promotional interest rate offered for a limited period of time on a new card, sometimes as low as 0%. It can apply to purchases, balance transfers or both. Once the introductory offer expires, the card reverts to a regular APR.
- Cash advance APR: This is the rate for borrowing cash from your credit card, typically higher than your purchase APR, with no grace period. It's also often applied to convenience checks.
- Penalty APR: Penalty APR applies to missed or returned payments, reaching as high as 29.99%. You might have to make several on-time payments in a row before your credit card issuer removes the penalty APR. Avoid this at all costs.
What is a good APR?
So, what's considered a good APR? According to the Federal Reserve, the average credit card APR exceeded 20% in early 2024. By that measure, credit card APRs are significantly higher than other forms of consumer credit, including some personal loans and auto loans. So, relatively speaking, a "good" credit APR may be one that's under 20%, although these can be tough to obtain.
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Credit card interest rates are generally very high, with some exceeding 30%. Make sure you check what the going rates are for any cards you may want to add to your roster. At TPG, we always recommend paying off your cards every month to avoid incurring interest charges, but we understand that may not always be possible.
How to calculate APR on a credit card
To understand how credit card companies calculate credit card interest, it's important to become familiar with a few additional terms:
Daily interest rate
Credit card issuers calculate the daily interest rate by dividing your APR by 365. This figure is also called your daily rate.
Compounding interest
Depending on the terms of your credit card agreement, a card issuer may take your daily rate and multiply it by your current balance or your average daily balance. The result is added to your overall balance, increasing the amount you owe. This process is called daily compounding interest.
Average daily balance
To calculate your average daily balance, write down your credit card balance at the end of each day in your billing cycle. Then, average those numbers together. (In other words, add the numbers, then divide the sum by the number of days in the billing cycle.)
Depending on your credit card agreement, you may be able to use the following formula (perhaps with some tweaks) to calculate the credit card interest you'll pay in a billing cycle:
- Daily interest rate x average daily balance x number of days in billing cycle = credit card interest
Here's an example to illustrate how credit card APR works:
- Calculate daily interest: Suppose your credit card APR is 18.25%. Your daily rate would be 0.05% in this scenario (18.25% ÷ 365 days = 0.05%).
- Figure out your average daily balance: We'll assume that your average daily balance is $1,000.
- Look up the number of days in your billing cycle: For this example, we'll assume a 30-day billing cycle. This number can vary from one card issuer to another.
- Calculate: Using the hypothetical numbers above, a daily interest rate of 0.05% (0.0005) multiplied by an average daily balance of $1,000 multiplied by a 30-day billing cycle equals $15 in interest charges.
How to avoid paying interest on credit cards
It's always nice to lock in the lowest possible interest rate when borrowing money. But APR might not matter as much with credit cards as it does with other types of credit — provided you follow an essential rule mentioned above: always aim to pay your full statement balance off by the due date of every billing cycle.
This rule is also one of The Points Guy's 10 commandments of credit card rewards.
When your credit card issuer sends you a copy of your credit card statement, you will have a grace period between your statement closing date and the due date on your account.
Per the Credit Card Accountability Responsibility and Disclosure Act of 2009, this grace period must last at least 21 days. As long as you pay off your balance during this grace period, i.e., by the due date, you should be able to avoid paying interest charges on your credit card account.
You could also opt to pay your credit card balance off early — before the statement closing date on your account. This strategy might help you lower your credit card utilization on your credit report and boost your credit score as a result.
However, if you're not in the habit of paying off your credit card balance every month, the credit card APR matters a lot. In this scenario, you should pay close attention to your credit card's APR. Because of their high average APRs, credit card interest charges can add up quickly.
Bottom line
Credit cards come with many attractive perks, especially rewards credit cards that allow you to earn points, miles, cash back and more.
Yet it's important to understand how credit card APR works and the steps you must take to avoid unnecessary costs. Otherwise, high-interest charges can offset any benefits you might receive.
Make sure you have a solid strategy for tracking your credit card spending and trying to avoid paying interest in the first place. If you are struggling with your credit card debt, create a plan to pay it down as fast as possible to avoid wasting money on interest.
For more information, check out our list of the best 0% APR cards a great place to start your research on current low-APR credit card options.
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
