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What is APR in Credit Cards?

APR is the Annual Percentage Rate varies in credit cards.

08 August 2022Lloyd Smith 6 min read
What is APR in Credit Cards?

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The annual percentage rate or APR is an essential factor to consider when applying for a credit card. It gives you a clear idea of the interest rate you can expect to pay for your card usage.

APR in credit cards varies based on several factors like your credit score, credit history, and your ability to repay dues on time. Understanding how APR works can enable you to avoid high interests and even improve your credit score.

Credit card APR is the annual interest rate charged on your credit card balance, excluding other additional fees like an annual fee, cash advance fee, or default fee.

Lenders must reveal the APR and other applicable fees before borrowers sign the credit agreement for transparency. The APR gets charged over your unpaid balances and you are liable to pay it. The exact interest rate and how it's charged over your credit card balance depends on your lender and [type of credit card](.

APR works differently in credit cards and loans.

How credit card APRs work

APR in credit cards is calculated as a percentage of your unpaid balance. It is not calculated annually, but daily and it is only charged if you carry a revolving balance from one month to another.

For instance, if your credit card APR is 5%, it doesn't mean you will be charged 5% interest annually. It means 5% will be charged on your unpaid balance at the end of the month and the same 5% will be applied to your balance everyday if your balance remains unpaid.

Credit card providers even grant grace periods before APR is levied. If you pay all your balance by the due date, APR will not be charged on your credit card purchases.

However, if you do not pay any of your balance by the due date or only pay the minimum amount, APR will be charged on the unpaid balance for every day that your balance remains unpaid.

How instalment loan APRs work

Instalment APR is the annual interest charged on instalment loans that you take. It can be charged on both secured and unsecured loans.

APR on personal loans includes:

  • The interest rate
  • Origination fees

Similarly, Mortgage APR or home loan APR may include;

  • The interest rate
  • Originating fee (the price of processing the loan)
  • A discount free (a fee paid upfront in exchange for a lower interest rate)
  • Closing costs (fees for closing the real estate deal, tax and mortgage insurance. The closing cost may be divided between the buyer and seller)

Mortgage APR may be fixed or variable in the case of adjustable rate mortgage and home loan refinancing.

Since APR is calculated daily, you have to convert the APR to a daily rate to calculate it. Your APR can be found on your billing statement.

Once you have the yearly APR, you can find the daily APR with the formula:

Daily APR= APR/365.

You can then multiply the daily rate by your unpaid balance to know how much interest you will pay over it.

For instance, if your credit card APR is 10%, then your daily interest rate will be 0.027%. If you have a $1000 unpaid balance, you will have to pay $1000.27 after applying the interest rate for the first day the balance remains unpaid past the due date. By the second day, if you do not make any credit card purchases, your new balance will become 1000.54 ( 1000.27+0.027%).

The interest will continue to accrue till you pay the unpaid balance. Therefore, it's considered best to not carry credit card balances from month to month.

Fixed APR

Fixed APR remains constant for a certain period or throughout the term. Card issuers may offer a lower introductory APR for a specific time period before applying the regular APR.

Variable APR

Variable APR fluctuates throughout the term based on several factors. It's more common in loans than credit cards. Variable APR may be affected by the cash rate set by the Reserve bank of Australia, competitive interest rate or increased financial institution funding cost.

Purchase APR

Purchase APR is charged on credit card purchase balances. Since the purchase interest rate has a grace period, it only starts accruing if you don't pay your balance at the end of the billing cycle.

Balance transfer APR

A balance transfer interest rate applies to the balance you transfer from one card to a balance transfer credit card. Unlike interest rate on purchases, a balance transfer interest rate does not have a grace period. It starts accruing from the day you made the balance transfer.

Cash advance APR

Cash advance APR is the interest rate on the cash you withdraw with your credit card. This one does not have a grace period and is often higher than purchase APR.

Promotional APR

Your card issuer may offer you a lower or 0% APR on new credit purchases and balance transfers for a limited period. You won't be charged any interest on balance transfers and purchases within the offer period.

However, some card issuers may apply deferred interest to their promotional APR. As such, if you do not pay off your balance before the end of the promotional period, you will be charged accruing interest calculated from the date you made the balance transfer or purchase.

Late fee APR

You may be charged APR over late fees or even defaults.

While APR is different from interest rate, in some cases, it may mean the same thing. It depends on the type of credit you are taking out.

When taking out an instalment loan such as a personal or property loan, the APR can include interest rate and other additional fees charged on your loan.

In contrast, credit card APR is the same as credit card interest rate. It does not include credit card fees.

Annual percentage rate (APR) differs from annual percentage yield (APY).

APR is the annual cost incurred for borrowing a loan or the interest on a credit card. APY is the amount you can earn on a deposit or investment annually.

Credit card providers decided on APR based on several factors and variables:

Credit history

Before your credit card can be approved, lenders will conduct a credit check to ascertain your credit worthiness. A low credit score can present you as a high-risk borrower, which may attract a high APR. Moreover, credit cards can affect your credit score too and therefore it is important to understand how they work and how your past credit cards have affected your credit history.

Debt to income ratio

The debt-to-income ratio is the percentage of your income spent on servicing debts. Card providers ascertain your ability to repay your credit card balance based on the debt-to-income ratio before they approve the application.

If your debt to income ratio shows you are paying off more debt than your disposable income, your application may be declined or approved with a high APR.

Type of credit card

The type of credit card you choose can also directly affect the APR you will be paying. Zero interest and low interest credit credit cards are always the best way to go if you are looking for low or zero APR, but they also come with limited benefits and rewards.

On the other hand, credit cards with an alluring rewards program or credit cards for bad credit often have high APR.

You can get a low interest credit cards by following these steps:

Pay up your balance on time

You don’t have to worry about credit card APR if you pay all your balances on time. If you have been struggling to make timely payments, you may want to cut down your credit card purchases so you can afford to pay up your balances in a timely manner.

Take advantage of promotional APR

Look for credit cards offering low APR for a promotional period or 0% APR on purchases and balance transfers. You can use this opportunity to pay your existing debt with little or no interest.

However, take note of the promotion deadline to avoid reversionary interests.

Avoid cash advances

Cash advances typically attract higher interest rates than credit card purchases, and they do not have a grace period either. Try to avoid taking cash advances. Only draw cash in real emergencies.

Renegotiate your APR

You can contact your lender or credit card company to request a decrease in your APR. You can be honest about your financial situation and why it may be difficult for you to continue with the existing APR without defaulting.

If your request is granted, your APR can be reduced for a fixed period and resumed after you are back on track with your finances.

Final words

You can be charged a high APR if you have a low credit score or if you end up getting a credit card which offers high benefits combined with high APR. That’s why, before you apply for a credit card or loan, check your credit score to ascertain your current financial situation.

With ClearScore, you get access to free credit reports so you can check credit score any time. Take a look.


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Written by Lloyd Smith

General Manager AU

Lloyd spreads the word about how awesome ClearScore is.