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The different types of APR for credit cards

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    Quick insights

    • APR, or annual percentage rate, is the yearly interest rate you pay on credit card balances.
    • Some credit cards have lower introductory APRs for the first few months or up to a year or more after account opening.
    • The higher your credit score, the more likely you may receive a lower APR if approved for a credit card.

    When applying for a new credit card, you may notice an advertised APR, or annual percentage rate. Most credit cards have an APR. It’s important to know what your card’s APR is because if you ever carry a balance on your credit card, your card’s APR will affect the total amount you pay over time.

    Read on to learn more about the different types of credit card APR and how different factors, like cash advances or late payments, can impact that percentage.

    What is APR?

    APR refers to the amount it costs to borrow money when using your credit card, and the rate varies by card. It’s the annual interest rate that you’ll pay if you carry a credit card balance (though the interest compounds daily). APRs can also impact other transactions, like cash advances or late payments (these transactions may have different interest rates than your regular rate).

    Your APR may differ from someone else’s, even if you both have the same credit card. This is because credit card companies use your credit score and other factors to determine your APR. Generally, you’re more likely to get approved for a lower APR if you have a higher credit score. Lower APRs can be more favorable, because you may pay lower interest on the money you borrow.

    Fixed-rate vs. Variable APR

    Your credit card will have either a fixed-rate or variable APR. Many credit cards have a variable APR – this means the rate may change over time. Variable APRs are associated with the prime rate, a baseline interest rate set by banks and lenders.

    Other cards may offer a fixed-rate APR, which means that your rate won’t change after you open your account.

    What is a good APR?

    A lower APR is generally considered better, since you’ll pay less interest on your credit card balance. An ideal APR would be 0%, but you’ll usually only find that rate as a new introductory (and temporary) credit card offer. This means your APR would only stay at 0% during the promotional period.

    Credit card APR vs. credit card interest

    When it comes to credit cards, your APR and credit card interest both refer to interest on an existing balance if it isn’t paid off in full at the end of each month. The difference is that APR is the annual rate, while interest rate is typically the daily amount that you’re charged based on your APR. Monthly APR can also help you understand how much it costs you to carry an unpaid balance each month.

    How to calculate monthly APR

    To calculate your monthly APR:

    1. Find your current APR in your credit card statement
    2. Divide your current APR by 12. This is your monthly periodic rate.
    3. Multiply that number by the amount of your current balance.

    For example, say you owe $500 on your credit card in a given month and your APR is 17.99%. You can find your monthly interest rate by dividing 17.99% by 12, which is approximately 1.49%. Then, multiple $500 x 0.0149 for a total of $7.45 each month. In short, your monthly interest rate on $500 is $7.45.

    How to calculate daily APR

    If you want to calculate your daily APR, the process is a little different:

    1. Find your current APR and current balance in your credit card statement.
    2. Divide your APR rate by 365 to find your daily periodic rate.
    3. Multiply your current balance by your daily periodic rate.

    Say your current balance is $500 for the whole month and your APR is 17.99%. Find your daily periodic rate by dividing your current APR (17.99%) by 365. Your daily APR in this case would be approximately 0.0492%. Then, multiply the $500 by 0.00049—which brings the daily periodic rate is $0.25.

    You can also calculate your average daily balance, or the sum of your daily balances divided by the number of days in a month. This may provide a clearly figure of a particular billing cycle’s interest.

    Types of APR

    Your credit card may charge you a different APR depending on the transactions you make. For example, you may need to pay a penalty APR if you consistently miss card payments. Here are a few common examples of different types of APR for credit cards:

    Purchase APR

    Purchase APR is the amount of interest you pay on normal purchases when you have a credit card balance. Your regular purchase APR applies when there aren’t any other factors that impact interest (like the ones we’ll detail below).

    The best way to avoid paying additional interest is by paying off your credit card in full each billing cycle.

    Balance Transfer APR

    You can consolidate debt by transferring the balance of one credit card to another; this is called a balance transfer. You typically pay a different APR on the transferred amount; some cards offer lower promotional APR for balance transfers that range from a few months to a year.

    Introductory APR

    Some credit cards offer lower introductory APR rates (sometimes even 0%) when you open a new card. This rate typically lasts between a few months to a year after the account opening. After the promotional period is over, your APR will increase to a regular purchase APR.

    Cash Advance APR

    If you use your credit card to withdraw cash, you may need to pay a higher cash advance APR. Keep in mind that cash advance APRs don’t have a grace period.

    Penalty APR

    If you make late payments or miss consecutive payments, your credit card issuer may charge you a penalty APR, which may be much higher than your regular purchase APR. To avoid penalty APRs, it could be best to set up automatic payments or payment alert reminders.

    It can also be helpful to familiarize yourself with your card’s terms and conditions, including what your penalty APR will be if you miss payments.

    In summary

    APRs are part of using a credit card, but improving your credit score may lead to a lower APR. You can also avoid paying interest on balances altogether by paying your card off in full each month. Paying off balances in a timely manner won’t lower your APR, but it can help you minimize the interest that accrues. It can be crucial to read your card’s terms and conditions so you know what to expect if any unforeseen circumstances arise.

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