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Imagine this: You just received a shiny new credit card. You swipe it for everything — a daily latte, groceries, and your monthly gym membership. But when your statement arrives, you pay less than the full balance.
That’s when the card’s annual percentage rate (APR) comes into play. APR is the interest charged on your outstanding credit card balance, and it can quickly accrue depending on how you manage your credit.
The actual APR you’ll pay on a revolving credit card balance varies based on several factors, but a firm understanding of your card’s APR can help prevent financial headaches.
How APR works
APR is used to calculate interest for all types of financial products, including mortgages, personal loans, and car loans. But while loans and mortgages typically have a set repayment period, credit cards don’t.
For credit cards, your APR is the amount charged for carrying a balance, expressed as an annualized rate. However, your actual interest is calculated by dividing that number by 365 (the number of days in a year).
Each day, the credit card company multiplies your average daily balance by the daily rate to calculate the daily interest charge. At the end of your billing cycle, the credit card company adds all the daily interest charges to your outstanding balance.
That said, most credit cards offer a grace period, the period between your monthly statement being issued and the payment due date. You won’t pay any interest if you pay the entire balance by the due date.
However, you lose that grace period if you don’t — and the credit card issuer will charge interest on your existing balance and any new purchases from the transaction date.
Types of APR
Not all APRs are created equal. Your credit card can have different APRs for different types of transactions:
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Introductory APR: This is a low or sometimes 0% APR offered for a limited time when you first get your card. Some credit cards offer introductory rates for 15 months, but they can be as long as 21 months after opening an account. But beware: The regular APR will kick in once the introductory period ends.
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Purchase APR: This is the APR charged on purchases made with your card. If you carry a balance month to month, this is the rate you’ll pay.
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Balance transfer APR: This APR applies when you transfer debt from one card to another. It can be lower than the purchase APR, and some cards offer a 0% APR on balance transfers to entice you to move your other credit card balances over.
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Cash advance APR: Need quick cash? Think twice. This APR kicks in when you withdraw cash from your credit line. This interest rate is usually much higher than the purchase APR and typically starts accruing immediately — no grace period here.
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Penalty APR: Miss a payment or make it late? You might get hit with this sky-high APR.
Fixed vs. variable APR: What’s the difference?
You’ll encounter two other types of APR with a credit card: fixed or variable, and the main difference between the two is predictability.
A fixed APR is just like it sounds: an interest rate that doesn’t often change. It’s stable and predictable, making calculating interest charges and payment amounts easier. However, it’s not guaranteed — and your credit card issuer can change your rate at any time, though they must notify you in advance.
A variable APR is much more common with credit cards and fluctuates based on an index rate, like the prime rate. If the index rate increases, so does your APR — and vice versa. This makes variable APRs less predictable and means you could pay different amounts of interest each month.
Also, remember that you may have a lower APR, but if you miss a payment, it could increase to a much higher interest rate.
Read more: What credit card users need to know if the Fed cuts rates
How to calculate APR on a credit card
The CARD Act of 2010 requires credit card companies to disclose your APR and other fees. This information is in a table — known as a Schumer box — on your statement. A Schumer box must be included in all credit card disclosures, presenting key terms in an easy-to-read format. This transparency helps you understand the cost of the card, including interest rates, annual fees, and other costs.
If you don’t have a current statement, log into your online account or call your card’s customer service team to find your current APR.
While your statement will list interest charges each month, you can also the simplified steps below to estimate the amount on your own. In this example, we assume you have a balance of $1,000 with an 18% APR. You don’t make any additional purchases during your 31-day billing cycle.
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Convert your APR into a decimal, then divide it by 365 to find your daily rate.
0.18 / 365 = 0.00049 daily rate -
Calculate your average daily balance by listing the balance at the end of each day in the cycle. Add up those numbers and divide by the number of days in your billing period.
Daily balance of $1,000 in a 31-day billing cycle = $31,000
$31,000 / 31 = $1,000 average daily balance -
Multiply the average daily balance by the daily rate and the number of days in the billing period.
$1,000 x 0.00049 x 31 = $15.19 in monthly interest costs
Learn more: How to calculate credit card interest
How your credit score affects APR on a credit card
The average credit card APR is approximately 21.51%, according to August 2024 data from the Federal Reserve.
But that rate is just that — the average — and the APR on your card will largely depend on your credit score and financial history. Higher credit scores typically receive lower APRs because they indicate a lower risk to lenders. Conversely, lower scores can lead to higher APRs.
According to the Consumer Financial Protection Bureau’s 2023 Consumer Credit Card Market Report, the average interest rates by credit score are:
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Superprime (800-850): 20.3%
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Prime plus (720-799): 22.6%
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Prime (660-719): 25%
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Near prime (620-659): 26.4%
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Subprime and deep subprime (300-619): 27.3%
Read more: Current credit card interest rates
How to lower your credit card APR
A May 2024 report from the Federal Reserve showed that 47% of Americans carried a balance for at least one month in 2023. If you’re among them, you can take steps to secure a lower interest rate and save on interest payments. Here’s how:
Improve your credit score
As mentioned, your credit score can significantly impact the APR offered by credit card lenders. Bumping up your score a few points can push you into another credit bracket and potentially save you a considerable amount.
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Pay bills on time. Payment history is a major component of your credit score. Set up automatic payments or reminders to ensure you never miss a due date. Consistent, timely payments demonstrate to lenders that you are a reliable borrower, which can lead to lower APR offers.
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Keep your credit utilization ratio as low as possible. Lowering your overall debt, especially high-interest debt, can improve your credit utilization ratio or the amount of credit you’re using compared to your total available credit. Aim to keep this ratio below 30%. Paying down existing balances not only improves your credit score but also reduces the interest you’re paying over time.
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Review your credit report for errors. Mistakes on your credit report can unfairly lower your score. If you find errors or inaccuracies, dispute them with the relevant credit bureaus.
Ask your card issuer
Sometimes, all it takes to get a lower APR is simply asking. Credit card companies often have the flexibility to adjust your APR, especially if you have a history of on-time payments and responsible credit use.
But it’s worth doing your research before making the call to help shape your request. Look into current APR offers to understand the current rates. When you call, highlight any improvements in your credit score, payment history, and other changes (like a salary increase).
Shop around
Sometimes, credit card companies won’t honor your request to lower your APR.
In that case, it’s time to look for an alternative card. Many credit card issuers offer a low or 0% APR to win new customers. Look for the best offer and then do a balance transfer to the newly opened account. While most companies do charge a balance transfer fee, that cost is likely much lower than the amount of interest you’d pay at your current APR.
Transferring your balance to one of these cards can give you a break from high interest rates, allowing you to pay down your principal faster. Be aware of balance transfer fees and ensure the long-term APR isn’t higher than your current rate.
This article was edited by Alicia Hahn
Editorial Disclosure: The information in this article has not been reviewed or approved by any advertiser. All opinions belong solely to Yahoo Finance and are not those of any other entity. The details on financial products, including card rates and fees, are accurate as of the publish date. All products or services are presented without warranty. Check the bank’s website for the most current information. This site doesn’t include all currently available offers. Credit score alone does not guarantee or imply approval for any financial product.