When you use a credit card, the term APR (annual percentage rate) plays a crucial role in determining the cost of borrowing.
Understanding your APR can help you make smarter financial decisions and avoid unnecessary debt, especially if you carry a balance from month to month.
This guide will break down how APR works, what types of APRs exist, and how percentages like 28% APR or 28.49% APR can impact your finances.
What Is APR on a Credit Card?
The APR represents the yearly cost of borrowing expressed as a percentage. It typically includes interest as well as certain fees, but may not include all possible borrowing costs.
For credit cards, the APR typically corresponds to the interest rate. While APR primarily matters when you carry a balance, it can also apply in other situations, such as with cash advances, deferred-interest promotions, or other transactions that may accrue interest immediately.
APR vs. Interest Rate
- APR reflects the total yearly cost of borrowing and may include interest along with certain fees, depending on the credit product.
- Interest rate refers specifically to the percentage charged on the principal balance, excluding additional fees.
Types of Credit Card APRs
Different transactions or scenarios may trigger specific types of APRs, each with its own rules and implications:
- Purchase APR: The interest applied to your regular purchases if you don’t pay the full balance by the end of the billing cycle.
- Cash-advance APR: Often higher than the purchase APR, this applies when withdrawing cash from your credit card. Cash advances often accrue interest immediately, without a grace period.
- Balance-transfer APR: Applies when you move balances from one card to another. Some cards offer 0% APR for a limited time on balance transfers.
- Penalty APR: Typically triggered if you miss payments by more than 60 days. This APR is often significantly higher and can apply for at least six months.
- Introductory APR: Some cards offer a 0% APR for a limited time — typically six to 18 months — as an incentive for new customers. Once the promotional period ends, the regular APR takes effect.
Fixed vs. Variable APRs
Credit card issuers can offer fixed or variable APRs:
- Fixed APR: This rate generally stays constant, although issuers can change it with advance notice.
- Variable APR: This rate is tied to the prime rate or another index. A variable APR can fluctuate based on economic conditions.
Most credit cards use variable APRs, which means your interest rate could increase if the prime rate rises.
How APR Works and How It Affects Borrowing
APR determines how much interest you owe if you carry a balance from one billing cycle to the next. Interest is typically calculated daily using the daily periodic rate, which is the APR divided by 365 days. Here’s an example:
Scenario:
- APR: 28%
- Balance: $1,000
- Daily periodic rate: 0.28 ÷ 365 = 0.000767 (or 0.0767%)
If your balance remains $1,000 for 30 days, the interest charged would be:
$1,000 × 0.000767 × 30 = $23.01
This amount will be added to your balance if you don’t pay in full.
What Do 28% and 28.49% APR Mean for You?
High APRs, like 28% or 28.49%, are often assigned to borrowers with lower credit scores or to certain types of credit cards, such as store cards. If you carry a balance on a card with this APR, your debt can grow quickly.
For example:
- A 28% APR means $28 in annual interest for every $100 owed.
- A 28.49% APR adds slightly more ($28.49 for every $100 annually), making it more expensive over time.
If you can’t pay your full balance, focus on making higher-than-minimum payments to reduce the amount of interest accruing.
Factors That Affect Your APR
Factors that influence the APR you are offered include:
- Credit score: A higher credit score often results in a lower APR.
- Economic conditions: If the prime rate rises, expect your variable APR to increase as well.
Monitoring your credit score and maintaining on-time payments can help you qualify for lower interest rates.
Conclusion
Understanding how APR works is essential for anyone using a credit card.
APR impacts the cost of carrying a balance. Knowing how to manage that cost — by paying off your balance in full or taking advantage of balance-transfer offers — can save you a significant amount in interest charges.
If you have a card with a high APR, such as 28% or 28.49%, make a plan to pay off your debt quickly and avoid carrying balances.
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