A Guide to Understanding Credit Card Interest Rates & APRs

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Credit cards can be a useful and convenient tool for purchasing items you might not otherwise have cash on hand for at the time. Quite often, a credit card is also required for certain transactions, such as booking a hotel, renting a car, or ordering items online. But without a clear understanding of credit card interest rates and APRs, you can quickly find yourself in trouble with credit card debt.

Don’t be fooled by credit cards with low introductory APRs or offers for cards with a 0% APR. While these are definitely preferable to credit cards with high interest rates, you would still be smart to know what the difference between APR and interest rate credit cards is before borrowing money from a financial institution.

Yes, you read that right; when you use a credit card, you are actually borrowing money, under the condition that you will pay it back, with interest if the funds are not paid back within a specified time period. There are, of course, ways in which you can avoid paying interest on your credit card.

Consider the information provided in this guide to understanding credit card interest rates and credit card APRs, and you’ll gain a much deeper understanding of how they work and possibly even improve your financial stability.

What is APR?

It’s time you have credit card apr explained to you. Many consumers are under the impression that the APR and the interest rate on your credit card are the same, but they are not. There is a clear difference between APRs and interest rates. The interest rate refers to the rate at which a balance remaining on a credit card incurs actual interest. The annual percentage rate, or APR, refers to the annual interest rate, plus any additional fees you are charged.

What this means is a lender calculates the APR by combining the interest rate and fees — this number then represents the interest you will be charged on any remaining balance on your credit card. But that being said, it is not uncommon for the interest rate and the APR to be the same number.

Now that you’re understanding APRS, let’s move on to other fees you should be aware of.

credit card in the dark

What Other Fees Are Included on Credit Cards?

Depending on the credit card you select, there may be additional fees you will pay throughout the year or in regards to specific transactions. These include:

  • Annual Fees: Many credit cards, especially rewards cards, often charge you a fee once a year for the use of the card.
  • Balance Transfer Fees: A fee incurred when you transfer a balance from one credit card to another. This is usually done when someone wants to move a balance from a high-interest credit card to a card with a lower APR. In fact, many credit cards offer a 0% APR on balance transfers for the first 18 months.
  • Foreign Transaction Fees: A fee you are charged when you use your credit card to make a purchase in another country that uses a different currency. Some credit cards made for travel do not have these fees.
  • Cash Advance Fees: A fee that is charged when you use your credit card to receive an actual cash advance. The APR for cash advances is also usually much higher than the APR for credit card purchases.

How Can You Tell the APR of a Credit Card?

When you first apply for a credit card, you will usually see a particular APR advertised, which is the purchase APR. This refers to the interest you will pay on purchases made with your credit card if you leave a balance on the card. Based on your credit score, you will likely receive a purchase APR ranging from 8-25%. A high credit score will receive a low APR, while a lender will perceive a low credit score as riskier, resulting in a higher APR on your credit card.

A lower APR is much better, of course. You’ll want to avoid paying any interest on credit cards with a high APR or it will be much more difficult to pay off the balance, since a good portion of your minimum monthly payment will be composed of the interest.

To have your credit card APRs explained, as well as any other fees and important information, consult the card’s Schumer Box. This is a box of information that presents the information pertaining to a particular credit card in an easy-to-read form. The Schumer Box is named after Charles Schumer, who introduced legislation during his time as a New York Congressman to ensure that consumers would have a better understanding of credit card terms. It has only been in existence since 2000, and discloses the following: 

  • Annual percentage rate (APR) for purchases
  • Other APRs, such as the interest rates for balance transfers or cash advances
  • Variable rate information
  • Grace period
  • Finance calculation method (aka. how the interest on a credit card balance is calculated)
  • Finance charges (aka the minimum amount charged on a balance each billing cycle)
  • Annual fee (if applicable)
  • Other fees, such as foreign transaction fees, balance transfer fees, late payments fees, etc.

Checking the Schumer Box before applying for any credit card will help you to make it easier to compare different credit card interest rates and APRs, so that you can make an informed decision.

How to Avoid Paying Interest on Credit Cards?

To avoid paying any interest at all on your credit cards, simply pay off the full balance before the end of each billing cycle. Any balance that remains on your credit card at the beginning of a billing cycle will incur interest. The higher the balance, and the higher the interest rate, the more interest you will accrue 

When you’re paying interest, you’ll actually wind up paying more for a purchase, so any good deals you managed to take advantage of are essentially nullified, since the interest you’ll pay will counter any savings.

When paying your credit card each billing cycle, you must pay a minimum. If you only continue to pay the minimum each month, it can take a very long time to pay off a large balance, and you could potentially spend thousands in just credit card interest alone. Of course, it’s understandable that you might not always be able to pay off the balance right away. For example, you might have had to use your credit card to charge a new water heater if you didn’t have the cash in savings. In situations such as this, it is best to attempt to pay off the balance as quickly as possible.

Interest is only charged on the balance that remains on your credit card at the beginning of each billing cycle. If you can make payments much larger than the minimum required payment each billing cycle, you will effectively eliminate large amounts of interest.

Other APR vs Interest Rate Credit Card Facts You Should Know

hand holding credit cards

Interest Grace Periods

Some credit cards have a grace period when you first make a purchase (typically 21-25 days). What this means is that while a balance on your credit card normally incurs interest daily, a new purchase usually won’t incur any interest for 21-25 days, enabling you to pay it off before being subject to an interest charge. Some credit cards do not have a grace period at all, so you’ll want to be aware of this before applying for a new card.

Types of APRs

Many APRs, such as those on mortgages and loans, are fixed APRs, which means the rate never changes. However, on credit cards, most APRs are variable, which means your credit card interest rate can change according to certain market conditions or other criteria. For example, if there is a change in your credit score, or a change in the Federal Prime Interest Rate, your APR might also change.

This change can occur at any time. A penalty APR might also be applied if you are late with your credit card payments. You’ll be subject to a higher rate for a specific period, at which time your creditworthiness may be reevaluated to see if you can return to a lower interest rate.

What are 0% APR Offers?

From time to time you might notice that many credit cards offer a 0% APR for an introductory period, which is usually 12-18 months. What this means is that any purchases you make during that specified period of time would incur no interest. There are also similar offers for balance transfers, allowing you time to pay off a balance without having to also pay interest. This makes it much easier to pay off a balance quickly, and subsequently makes a particular credit card more appealing.

However, you must still make your minimum payment each month, and if you only make the minimum payment, it is very likely that you will still have a balance remaining when the introductory period ends. Interest according to the card’s normal APR will then be charged on the remaining balance.

Choosing a Good 0% APR Offer

Not all credit card APR offers are created equal. The upfront promotion always looks good, but you’ll want to take the time to further investigate and evaluate the different offers to see which one is best for you. For example, some credit cards may come with higher fees than others, or a higher interest rate when the introductory period ends. You’ll also want to see what the penalty fees are, and what else occurs when the introductory period ends.

As mentioned above, you will be charged interest on any remaining balance after the introductory period is over. Paying off this balance as quickly as possible will help you to avoid paying excessive interest. As another option, you can apply for a 0% balance transfer card. This will enable you to transfer your balance to another card and continue to pay it off with no interest incurred for a period of time. However, be advised that there is usually a balance transfer fee, and transferring balances too often can affect your credit score negatively.

How Do You Lower Your Apr on Credit Cards?

Just as your credit card APR might be raised according to the Federal Prime Rate, so too can it be lowered if the Federal Prime Rate goes down. However, while lenders will raise the APR automatically, they usually will not lower it without prompting from you. From time to time, if you call your lender and ask to see if you can get a lower APR, a customer service representative will check and see if it is possible. Sometimes the lender might be able to lower your APR significantly, other times it may be only a very small percentage. Even so, even a small amount can make a big difference in the credit card interest incurred on high balances.

getting credit card from wallet

Understanding Credit Card Interest Rates & APRs is Essential to Financial Success

Credit card debt is a major problem hundreds of thousands of Americans face. This is mainly due to the fact that many consumers simply can’t pay down their balances in a timely fashion, and wind up with balances that seem to never dwindle due to the interest that is incurred each month. In order to avoid debt, it is best to avoid using your credit cards, except in emergencies, and to pay down any credit card balances as quickly as possible. If you can pay a balance before a grace period ends, thus avoiding any interest at all, even better.

Be sure to always read the details in the Schumer Box thoroughly before applying for any credit card. There may be fine print or details that you overlooked in an initial presentation that will make you realize that a particular credit card is not offering such a good deal after all.

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