Your credit card APR may not be as straightforward as it seems. To fully understand your credit card's interest rates, you have to know that different balances are charged interest at different rates.
If you're going to carry a balance on your card, do a balance transfer, or take a cash advance, it's important to understand how credit card interest works.
What Does APR Mean?
APR stands for “annual percentage rate.” This term refers to the interest you pay on your credit card balance, which the credit card company calculates on a compounded daily basis.
Most credit card APRs are variable, which means they correlate with a specific benchmark interest rate (often the prime rate). These can change with fluctuations in that rate. The variable APR is usually a margin above the benchmark rate, e.g. prime rate + a percentage.
What Are the Different Types of APR on a Credit Card?
When it comes to credit cards, the APR you pay can vary depending on the type of transaction you make. Here are the different types of APRs that commonly apply to credit card transactions:
- Purchase APR: This is the interest rate for credit card purchases if not paid in full by the due date. Purchase APRs can vary widely and have a lot to do with your credit score. A higher credit score helps get a lower APR.
- Balance transfer APR: When you transfer a balance from one credit card to another, there's often a special APR for that balance. Balance transfer APRs can be promotional, meaning they are low or even 0% for a limited period, or they can match the purchase APR. It's crucial to understand the terms of a balance transfer, as there might be fees associated with the transfer.
- Cash advance APR: When you use your credit card to withdraw cash from an ATM or get cash back at a store, you're conducting a cash advance. Cash advances typically have a higher APR compared to purchase APR and they start accruing interest immediately — there’s no grace period for a cash advance.
- Penalty APR: This is a higher APR that can apply if you miss payments or violate other terms of your credit card agreement. It can be applied for several months or even indefinitely, depending on the issuer. It's usually a consequence of late payments and can have a severe impact on your finances.
- Introductory APR: Many credit cards offer introductory APRs as a promotional incentive. These can be 0% or a low rate for a specified period (usually for six to 18 months) after opening the account. They're often applicable to purchases, balance transfers, or both. After the introductory period, the APR reverts to the regular rate. It’s important you pay your balance off before then.
Related: How Credit Cards Work
Where Can You Find Your Credit Card APR?
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Not sure what your credit card APR is? No worries — you can find your credit card APR in several places:
- Credit card agreement: This document is provided by the credit card companies when you open an account. Like the name suggests, it outlines all the terms and conditions associated with your card, including the various APRs (purchase, balance transfer, cash advance, etc.).
- Monthly credit card statement: Your credit card statement usually includes a section that lists the various APRs applicable to your account. Look for a section that provides interest rate information. It should detail the APR for different types of transactions.
- Online account: Most credit card issuers provide online account portals where you can log in to manage your account. Within this portal, you can often find detailed information about your account, including your current APRs.
- Mobile app: Many credit card issuers have mobile apps that allow you to manage your credit card account from your smartphone. These apps usually give you quick access to your account details, too, including APR information.
- Customer service: You can also contact your credit card issuer's customer service to learn the current APRs on your account and get answers to any other questions you might have about your account.
Tips for Lowering Your Credit Card APR
Credit card APRs can vary based on your creditworthiness, the type of transaction, and promotional offers. It's quite important you understand the APRs linked to your card since they have a big impact on borrowing costs.
The good news is there are a few things you can do to get a lower APR to minimize the costs if you ever end up carrying a balance on your credit card.
Improve your credit score
Lenders often offer lower APRs to borrowers with better credit scores. Not sure how to give your credit score a boost? Here are some best practices for raising your credit score over time:
- Pay your bills on time to build a solid payment history
- Keep credit card balances low — aim for a credit utilization ratio under 30%
- Work towards paying off existing debt
- Avoid opening multiple new accounts
- Regularly check your credit report for errors and dispute any inaccuracies
- Maintain a diverse mix of credit types, like credit cards and installment loans
Patience is key here — building credit is a long-term journey. Improving your credit score takes time and consistently responsible behavior.
Negotiate with your credit card issuer
Contact your credit card issuer and inquire about the possibility of reducing your APR. If you have a good payment history and have been a loyal customer, they might be willing to accommodate your request to retain your business. There are no guarantees here, but it never hurts to pick up the phone and ask.
Shop around for a balance transfer
If you have a high APR on one credit card, consider transferring the balance to a card with a lower APR. It’s best if the card offers an introductory 0% APR on balance transfers so you can get a break from interest all together for a period. This will give you a head start on reducing your balance. Being able to make progress on paying off your balance without having to pay interest is a major win. Be mindful of the balance transfer fee to ensure that the interest savings outweigh the cost of the fee.
How To Avoid Paying Interest Altogether
You can actually avoid paying interest at all by taking advantage of your card's grace period.
The majority of cards have an interest rate grace period on purchases. This means that interest on purchases does not always start accruing right away. You won't be charged interest on purchases if you paid off your balance in full last month.
The key here is that you must pay your credit card off in full every month. Not just your purchase balance, but your whole balance. No grace period on purchases if you carry a balance after a balance transfer, even with monthly purchase balance payments.
You must bring your entire balance down to zero to avoid interest charges.
FAQ
What is a good credit card APR?
As of May 2024, the average APR for a credit card in the United States was 21.5%. Ideally, you’ll receive an APR at or below this number. Remember, the better your credit score is, the lower your rate should be. For individuals with excellent credit (around 750+), a good APR might be below 15%, while those with good credit (670 to 749) might find 15% to 20% competitive. If you have average credit (580 to 669) you could find yourself with an APR of 20% to 25%. Those with poor credit (below 580) will likely receive higher APRs, often exceeding 25%.
What is the difference between fixed and variable APR?
There are two types of APRs, fixed and variable. Credit cards commonly have variable APRs, but some companies now allow transferring part of the balance to a fixed APR. So it’s important you understand the difference.
Fixed APR remains constant throughout a loan or credit card term, offering payment predictability but no benefit if market rates drop. Variable APR changes with market interest rates, meaning they can start out lower than fixed rates but with the risk of increases as the market changes.
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