If you’ve ever shopped around for a credit card, then you’ve probably seen promotional APR offers. These tend to say things like “0% introductory APR!” and “no interest for the first 12 months!”
But how exactly does an APR work, and is it actually important when choosing a credit card? Well, the answer might surprise you. Here’s everything you need to know about credit card APR.
What is a credit card APR?
APR stands for annual percentage rate. It essentially describes how much interest you’ll pay on outstanding balances.
As of a few years ago the national average credit card APR is 15.07%. So if you have a 15.00% APR, then you can expect to pay interest valued at 15 percent of your unpaid debt over the course of a year.
Sounds simple, right?
Well, that’s not quite the whole story. An APR gives us a general sense of our yearly interest rate. But with credit cards, we don’t pay interest on a yearly basis.
Therefore, using the above example, a credit card with a 15.00% APR that’s divided by 365 has a daily periodic rate of 0.041%.
This daily accumulating interest will stick to any unpaid balance at the end of the month. And since interest is calculated every day, the longer you wait to pay off your credit card debt, the more interest you’ll end up paying.
So does your APR stay fixed, or can it change from year to year? Well, that all depends on whether you have a fixed APR or a variable APR.
How to compare fixed vs. variable APR
As the terms suggest, variable APRs can fluctuate while fixed APRs tend to stay the same. Each credit card company calculates its own annual percentage rate.
To determine a variable APR, a card issuer adds its margin to a reference rate, like the U.S. Prime Rate. As of December 2016, the U.S. prime rate was 3.75%.
When the prime rate changes, variable APRs change with it. Therefore, credit card companies update variable APRs on a monthly or quarterly basis.
A fixed APR, on the other hand, doesn’t rely on the U.S. prime rate. It’s more stable, though companies can make changes from time to time. They just have to tell you first.
One credit card can have several APRs
Not only are there two types of APRs, there can also be several different APRs attached to a single credit card.
Most credit cards have different APRs for each type of transaction. They may also have a promotional APR, like a 0% balance transfer offer that lasts for several months after opening.
A credit card could have a penalty APR as well. A penalty APR charges extra if you violate the terms of the credit card agreement.
To gain a clearer sense of all these interest rates, let’s take a look at the Chase Freedom Unlimited card. Here are its three main APRs as of this article’s publication, all of which are variable.
- Purchase APR: 0% Intro APR for the first 15 billing cycles that your account is open. After that, it’s 14.49% to 23.49%, based on your creditworthiness. This APR will vary with the market based on the Prime Rate.
- Balance Transfer APR: 0% Intro APR for the first 15 billing cycles that your account is open. After that, 14.49% to 23.49%, based on your creditworthiness. Again, these APRs will vary with the market based on the Prime Rate.
- Cash Advance APR: 25.49%. This APR will vary with the market based on the Prime Rate, too.
Where do these APRs come from? Chase explains: “We add 10.74% to 19.74% to the Prime Rate to determine the Purchase/Balance Transfer APR. We add 21.74% to the Prime Rate to determine the Cash Advance APR.”
For more details on the Chase Freedom card or to browse other credit cards offers, check out the Student Loan Hero Marketplace. You’ll see that the marketplace credit cards, like Chase Freedom, give a range of rates “based on your creditworthiness.”
Why your APR depends on your creditworthiness
You and your friend may both have a Chase Unlimited Freedom card, but you could have two different APRs. Why is that the case?
Issuers offer you a credit card APR based on your “creditworthiness.” Therefore, when you apply, they take a hard look at your credit score.
As you may know, your credit score is based on a number of factors, including your repayment and credit history. The stronger your credit score is, the lower your APR will be. If you have a weak credit score, then you’ll get slapped with a high APR.
Does credit card APR really matter?
While it’s great to understand all these terms before committing to a credit card, how important is credit card APR? Should it really determine what credit card you choose?
Here’s the thing about credit cards — even a relatively low APR is pretty high. Credit card interest rates are so heavy, you want to do everything you can to avoid credit card debt.
A good rule of thumb is this: don’t spend more than you can pay off every month.
If you follow this rule, then you’ll never have to deal with worrying about an APR. You’ll pay off your purchases in full, so interest becomes a non-issue.
Then, instead of worrying about the APR, you can look at other parts of a credit car offer. For instance, you could choose a credit card based on rewards like cash back or travel points.
That being said, promotional periods of 0% APR can be useful if you need to make a big purchase and pay it back in installments. I bought a Macbook Air during a promotional period, and I was able to pay it back over several months without incurring any interest.
The bottom line is if you’re using a credit card, you shouldn’t carry a balance over from month to month. Then, you don’t have to worry about APR at all.
In effect, your APR will always stay at 0%, right where you want it.
Looking to open a new credit card? This guide will help you choose the best credit card for your spending habits.
Interested in a personal loan?Here are the top personal loan lenders of 2019!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
†Per reviews collected and authenticated by Bazaarvoice in compliance with the Bazaarvoice Authentication Requirements, supported by anti-fraud technology and human analysis. All reviews can be reviewed at reviews.lendingclub.com
**Based on approximately 60% of borrowers who received offers through LendingClub’s marketing partners between January 1, 2018 to July 20,2018. The time it will take to fund your loan may vary.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|5.75% – 16.24%1||$5,000 - $100,000|
|7.46% – 35.99%||$1,000 - $50,000|
|7.99% – 35.89%*||$1,000 - $50,000|
|5.99% – 24.99%2||$5,000 - $35,000|
|5.99% – 29.99%3||$7,500 - $40,000|
|6.79% – 20.89%4||$5,000 - $50,000|
|9.99% – 35.99%5||$2,000 - $25,000|
|6.95% – 35.89%6||$1,000 - $40,000|
|6.99% – 18.24%7||$5,000 - $75,000|
|9.95% – 35.99%8||$2,000 - $35,000|