Help! I Really Don't Understand My Credit Card APR

What Is a Credit Card APR?

They’re three little letters you’ll see in every credit card Schumer Box: APR—and while you probably understand the acronym has something to do with the interest you’ll pay on charges you carry from month to month, you may be wondering what that credit term is all about. After all, why aren’t issuers just advertising their interest rates? And what does APR mean? Simply put, your APR, or annual percentage rate, is the amount of interest you’ll pay annually. Its meant to give you a more complete understanding of just how much carrying a credit card balance will cost you.

APR calculations are undoubtedly complicated (more on this in a minute). However, if you’re not itching to do any math, there are two major tenets of credit card APRs to note. First, the lower the APR, the less costly carrying a balance will be. Second, you can avoid paying a credit card’s APR entirely if you simply pay for your purchases in full each time a statement shows up.

Most issuers offers what’s known as a “grace period” — a set amount of time (usually 21 days) you have to pay your entire balance without being charged any interest. It’s a good idea to read the fine print of your card agreement to be sure if you have a grace period and how long it might be. For now, let’s break down the APR definition even further.

Variable vs. Fixed Rate APRs

Variable-rate credit cards are tied to an index such as the U.S. prime rate. And when the prime rate changes, credit cards linked to the prime rate will change as well. A card with a variable APR may change monthly, quarterly or at another interval disclosed in your cardholder agreement.

The rate on fixed-rate or non-variable credit cards is not tied to an index but it is possible for this rate to change, as well. Fortunately, your card issuer is required by law to give you plenty of notice before doing so.

According to the Credit Card Accountability, Responsibility and Disclosure Act of 2009, (the Credit CARD Act), a card issuer must generally provide 45-day advance notice of any interest rate increases.

You Probably Have More Than One APR

Take a close look at your credit card’s monthly statement or the fine print of that Schumer Box and you will see that your credit card issuer may charge different APRs for different credit card transactions. The different APRs generally include a:

Purchase APR, imposed on the items you buy with your credit card.
Balance Transfer APR, imposed on any balances you transfer over from a different credit card.
Cash Advance APR, imposed when you use a credit card like an ATM card; cash advance APRs are typically very high and interest generally starts accruing on any money you use the card to take out immediately.
Penalty APR, imposed to balances when you fail to pay your credit card account as agreed

How Do my APRs Affect My Monthly Interest Charges?

Most credit card issuers use a daily periodic rate to calculate interest charges on your credit card account for each month that you carry a balance. The formula for the daily periodic rate (DPR) is simple. It’s the APR for your credit card transactions divided by 365. Your DPR gets multiplied by your average daily account balance and the number of days in the statement billing cycle. (How issuers calculate your average daily account balance can vary, but the most common practice involves totaling a month’s daily balance and dividing that number by the number of days in said month.)

To illustrate how all this works, let’s say your card carries a variable APR of 15%. Your DPR would be .041. Now, for simplicity’s sake, let’s say you charged $500 on the very last day of your billing cycle and that cycle had 28 days. The amount of interest you would pay that month would be $5.74 once you multiple your average daily account balance by your DPR and the amount of days in your billing cycle.

$500 x .00041 x 28 = $5.74

While that may seem like a paltry price to pay, remember, credit card interest compounds, meaning you’re paying interest on interest once you start revolving a balance day-to-day. And, again, you generally have more than one APR associated with your credit card, so, depending on how you’re using your card, the calculations can get even stickier.

How Do I Know if I Have a Good APR?

If these calculations are making your head spin, remember, in the most basic of terms, the higher your APR, the more interest you will pay when you carry a card balance. That means, when choosing between credit card offers, it’s generally a good move to go for the card with the lowest APR, especially if you plan to make big purchases that you plan to pay off over several months. That way, you’ll save money every time you carry a balance.

To qualify for a credit card with a low APR, you’ll need good credit. You can check your credit scores for free using Credit.com’s free credit report snapshot. You’ll also receive free tips and advice on improving your credit scores.

Do Mortgages & Auto Loans Carry APRs?

It’s important to note that credit cards aren’t the only financing that will tout an APR. Mortgages and auto loans, for instance, also typically disclose an APR, in an addition to their standard interest rate, to give borrowers a better understanding of how much they’re actually paying for the financing. A mortgage’s APR, for instance, includes your interest rate, plus points, mortgage broker fees, and other fees associated with the loan. An auto loan’s APR similarly includes all the interest plus fees you’ll have to pay to finance your car. You can go here to learn more about how interest rates work.

Jeanine Skowronski contributed to the reporting in this article.