What Is APR and Why Does It Matter? 

The annual percentage rate (APR) is a crucial term to know because it directly impacts how much you’ll pay when borrowing money. It’s something you’ll want to compare any time you apply for a loan or open up a new credit card. 

APR sounds similar to APY, which stands for annual percentage yield. But one is important from a borrower’s perspective and the other is important from a saver’s perspective. Here’s what you need to know about a financial product’s annual percentage rate. And how you can potentially get a lower APR on a loan or credit account. 

Erika Taught Me

  • Annual percentage rate, or APR, is a measure showing how much it costs to borrow money
  • APR and interest rate are related, but the annual percentage rate incorporates other costs such as lender fees
  • For credit cards, the annual percentage rate is usually the same as the interest rate, and you can compare APRs when choosing a credit card
  • Your credit score affects your annual percentage rate on loans and credit cards
  • Lenders must disclose the annual percentage rate before you sign up for a product

What is APR?

APR is the annual percentage rate, which includes not only the interest rate lenders charge but any other lender fees or closing costs that might be part of a loan. The annual percentage rate can be fixed or variable. Which tells you whether your rate may change without warning based on an index such as the U.S. prime rate. 

While the annual percentage rate affects individuals who are borrowing money, it’s also the figure showing how much an investment earns in a given year. But without factoring in compounding interest. (Here we’re focusing more on how APR costs you, the consumer or borrower.)

All lenders, such as banks and credit card issuers, are bound by the Truth in Lending Act (TILA), passed in 1968. Thanks to this legislation, whenever you apply for credit, the lender must disclose the APR so that you know how much it will cost you to borrow the funds. So anytime you need a vehicle loan, personal loan, or other form of credit, it is a crucial figure to consider. 

APR vs. APY

No doubt you’ll see both APR and APY at certain points, but the terms affect your finances as a consumer in very different ways. The annual percentage rate is generally what you need to know as a borrower about any loans or credit accounts. As it indicates how much you pay to borrow funds. But APY, or annual percentage yield, is usually something you’ll see to indicate how much interest you’ll earn on investment products. 

APY takes compound interest into account, while the annual percentage rate does not. (Remember, compound interest means the money earned on your invested funds as well as the interest earned on the interest.) When you know the APY of a financial product like a savings account or certificate of deposit (CD), you can calculate how much your savings will grow. 

The APY of a savings vehicle like a CD is based on the interest rate and how often interest compounds in a year. Two savings accounts with a 4% APY sound identical, but if one compound annually and the other compound monthly, the latter will yield a bit more interest by year’s end.  

When researching savings accounts, be sure to include APY as one of the main factors to compare. The higher the APY, the greater the potential for your savings to increase. 

Fixed vs. Variable Annual Percentage Rate

Loans can offer customers either a fixed or a variable APR. A fixed APR doesn’t fluctuate when an index changes. For example, if your account is linked to the prime rate when the prime rate increases, your loan provider cannot instantly raise your APR without notice. 

If you have a fixed APR card, your credit card issuer is required to provide notice 45 days before increasing your interest rate or changing any other fees associated with your account.

That’s not the case with variable APRs. With a variable APR tied to an index, that rate may fluctuate whenever the index changes, which can be risky for you when borrowing money. The one caveat is that purchases made prior to the rate increase will remain at the previous APR. 

When it comes to credit cards, you’ll typically see variable APRs that can change often. That’s one more reason it’s beneficial to pay off credit card balances in full if possible. Rather than carrying a balance from month to month. 

What are the different types of annual percentage rates on a credit card?

You might not realize that your credit card's APR doesn't stay the same for all types of transactions. Here are the different types of APRs credit card issuers tend to charge:

When you’re choosing a new credit card, you should be aware of the different APRs you’ll be charged. Most of us focus on the APR for purchases, and that may represent the majority of the borrowing you do. However, it’s important to know how much your card charges for the balance transfer APR and if you ever take a cash advance, as well. 

You’ll probably face the highest APR on cash advances, in part due to there being no grace period. Interest begins to accrue immediately. On the other hand, interest on new purchases doesn’t start to accrue until after a grace period, which is usually 21 days.

Balance Transfer

If you’re opening up a card expressly for a balance transfer to take advantage of a 0% APR offer to help pay off debt sooner, pay attention to how long that introductory rate lasts. Make a plan to either pay off the balance in full within that time to avoid the shock of a higher APR. Or perhaps find another balance transfer offer with a low APR. 

In general, you should be aware of when your card issuer is charging an introductory APR versus a regular APR. You may not be able to avoid the rate increase, but you can make it a goal to improve your credit score before an introductory APR period ends. Possibly leading to a more reasonable increase. 

Most credit cards charge a penalty APR as well. The penalty APR is a consequence of missing two consecutive payments or being 60 days late on your credit card payment. Your APR will go up as high as 29.99% and usually won’t decrease until you’ve made at least six months of on-time payments. You could also face more expensive borrowing after this event and a ding to your credit score. 

Related: How does APR work on a credit card?

Man in front of a computer holding a document. Guide on understanding what is APR and why does it matter.

Where to find your Annual Percentage Rate?

Finding out how much your loan or credit card’s annual percentage rate is should be fairly simple. Check your monthly credit card statements for sections on fees and interest charges. And you should be able to locate the APR.

Your credit card issuer should also list any differing annual percentage rates such as for balance transfers, cash advances, or penalty APRs on your statement. And of course, you should inspect the signup paperwork for all APR information prior to getting a new credit card. 

What factors affect your Annual Percentage Rate?

One of the major factors impacting your annual percentage rate when, say, you're shopping for a new credit card, is your credit score. This is the number ranging from 300 to 850 that represents your creditworthiness. When you need to borrow money, the higher your credit score, the better. When your score is in the Good to Excellent range, you’ll enjoy more competitive APR offers.

Other factors impacting the annual percentage rate include the current prime rate, your income and debts, and the type of loan you’re applying for. 

Be aware that credit card companies often offer promotional APRs to give you a lower borrowing rate temporarily. However, the card issuer must clearly state how long the promotional period lasts. Know when the rate will change. And what your new credit card annual percentage rate will be moving forward. Especially if you’ve undertaken a balance transfer for a 0% APR offer, as interest rates may skyrocket once promotional periods are over. 

FAQs

What is a good APR? 

You can’t control all factors impacting the annual percentage rate you’re charged. However, building and maintaining a good credit score can ensure you’ll receive the best possible APR offers on the market for that time. 

Do some research on the current month’s average annual percentage rate for the specific type of loan or credit card you need. For example, in August 2023, the Federal Reserve reported the average interest rate for credit cards charging interest was 22.77%, so a rate below that may be considered a good APR. 

How can I lower my APR?

The best way to lower your annual percentage rate is by paying off all debts on time and in full. That will eventually improve your credit score, which is essential for securing lower APRs. Plus, when you pay off your credit cards in full, you don’t need to worry about interest rates anyway. (Conversely, missing payments or carrying an ever-growing balance may lead to your card issuer increasing your APR.) 

Aside from that, you can call your card issuer to ask for a reduction in APR, especially after raising your credit score. Looking for new credit cards with a 0% introductory APR can also be effective. As long as you monitor when the introductory rate will end. 

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I'm an award-winning lawyer and personal finance expert featured in Inc. Magazine, CNBC, the Today Show, Business Insider and more. My mission is to make personal finance accessible for everyone. As the largest financial influencer in the world, I'm connected to a community of over 20 million followers across TikTok, Instagram, YouTube, Facebook and Twitter. I'm also the host of the podcast Erika Taught Me. You might recognize me from my viral tagline, "I read the fine print so you don't have to!"

I'm a graduate of Georgetown Law, where I founded the Georgetown Law Entrepreneurship Club, and the University of Notre Dame. I discovered my passion for personal finance after realizing I was drowning in over $200,000 of student debt and needed to take action-ultimately paying off my student loans in under 2 years. I then spent years as a corporate lawyer representing Fortune 500 companies, but I quit because I realized I wanted to have an impact; I wanted to help real people and teach them that you can create a financial future for yourself.

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Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.

Advertiser Disclosure

Our aim is to help you make financial decisions with confidence through our objective article content and reviews. Erika.com is part of an affiliate sales network and receives compensation for sending traffic to partner sites, such as MileValue.com. This compensation may impact how and where links appear on this site. This site does not include all financial companies or all available financial offers. This in no way affects our recommendations or article content.