What Exactly Is Credit Card APR? And Does It Really Matter?

credit card APR

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.

Instead, credit card interest is calculated every day with a daily periodic rate. To calculate most daily periodic rates, you divide the APR by 360 or 365, depending on the credit card issuer.

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.

If you’ve used a credit card before, you know you can do more with it than make purchases. You can also get a cash advance or make a balance transfer.

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 2018!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

2 Important Disclosures for Citizens Bank.

SoFi Disclosures

  1. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Finance Lender Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
  2. Personal Loans: Fixed rates from 5.49% APR to 14.24% APR (with AutoPay). Variable rates from 5.29% APR to 11.44% APR (with AutoPay). SoFi rate ranges are current as of December 1, 2017 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 5.29% APR assumes current 1-month LIBOR rate of 1.34% plus 4.20% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

Citizens Bank Disclosures

  1. Personal Loan Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of August 1, 2017, the one-month LIBOR rate is 1.23%. Variable interest rates range from 6.02% – 15.97% (6.02% – 15.97% APR) and will fluctuate over the term of your loan with changes in the LIBOR rate, and will vary based on applicable terms and presence of a co-applicant. Fixed interest rates range from 5.99% – 16.24% (5.99% – 16.24% APR) based on applicable terms and presence of a co-applicant. Lowest rates shown are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with Citizens Bank at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, Citizens Bank checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Benefit: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.39% - 29.99%$1,000 - $50,000Visit Upstart
5.29% - 14.24%1$5,000 - $100,000Visit SoFi
8.00% - 25.00%$5,000 - $35,000Visit Payoff
5.99% - 16.24%2$5,000 - $50,000Visit Citizens
5.99% - 35.89%$1,000 - $40,000Visit LendingClub
5.25% - 14.24%$2,000 - $50,000Visit Earnest
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Student Loan Hero Advertiser Disclosure

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print, understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.