What is Credit Card APR (And How Does It Work)?

What does Credit Card APR (Annual Percentage Rate) Mean?

credit cards floating

Credit card APR, or annual percentage rate, is the interest rate charged on unpaid balances on a credit card. This amount shows the cost of borrowing money on a credit card and you can normally see it expressed as a percentage. Credit card APR can vary significantly depending on the credit card issuer and the borrower’s credit score.

Max Cash® can help you learn more about what APR means and what to look out for!

How Does it Work?

When you use a credit card to make a purchase, you are essentially borrowing money from the credit card issuer. If you don’t pay off the balance in full, the card issuer will charge interest on the unpaid balance. Card issuers determine interest by calculating the amount using the APR.

For example, let’s say you have a credit card with an APR of 20%. Then you make a purchase of $100. If you don’t pay the full balance by the due date, the issuer charges you interest on the unpaid balance. The interest charge calculation follows this formula:

Interest = APR * unpaid balance/number of days in the year

In this case, the interest charge would be $20 (20% * $100 / 365 days).

It’s important to note that APR is not a flat fee. Instead, the card issuer finds the amount by calculating the daily unpaid balance. This means that the longer you carry a balance on your credit card, the more interest you will pay.

How Card Issuers Determine APR

woman in front of credit card score meter

The credit card issuer determines the credit card APR, and it can vary significantly depending on a variety of factors. Some of the factors that may affect APR include:

  • Credit score: Borrowers with a higher credit score are typically offered a lower APR because they are considered a lower risk to the credit card issuer.

  • Credit card issuer: Different credit card issuers will have different APRs for their credit cards. It’s important to compare APRs from different issuers to find the best rate.

  • Credit card type: Different types of credit cards, such as rewards credit cards or balance transfer credit cards, may have different APRs.

  • Federal Reserve interest rate: The Federal Reserve sets a benchmark interest rate that can impact the APR on credit cards. When the Federal Reserve raises its interest rate, credit card issuers may also raise the APR on their credit cards.

How can you avoid paying high interest?

woman thinking next to cash jar

There are a few steps you can take to avoid paying high interest on a credit card:

  1. Pay off your balance in full each month: If you pay off your balance in full each month, you will not be charged any interest.
  1. Use a credit card with a 0% introductory APR: Many credit cards offer a 0% introductory APR for a limited time, usually for purchases or balance transfers. This can be a great way to avoid paying interest on your credit card balance.
  1. Transfer your balance to a credit card with a lower APR: If you have a high APR on your current credit card, you may be able to save money by transferring your balance to a credit card with a lower APR. Just be sure to read the fine print and understand any balance transfer fees that may be associated with the transfer.
  1. Improve your credit score: As mentioned earlier, borrowers with a higher credit score are typically offered a lower APR. You can improve your credit score by paying your bills on time, keeping your credit utilization low, and avoiding applying for new credit unnecessarily.

Credit card issuers determine it and it can vary significantly depending on a variety of factors. By paying off your balance in full each month, using a credit card with a 0% introductory APR, or transferring your balance to a new lower interest card, and improving your credit score in other ways, you can utilize a credit card in the most financially savvy manner. A credit card can also help to build your credit. You can also take advantage of any cash back or other rewards while ensuring your financial stability.

Learn More About Applying for Credit Cards with Max Cash Today!

applying for a credit card online

Now that you are familiar with credit cards and APR, consider the credit card offers that could be available to you online!

Take a look at Max Cash’s site for side-by-side comparisons of offers and the APR they offer. We’ve done the hard work for you- all you need to do is select the most suitable fit that stands out!

Click here to learn more!

By Jaime Gonzalez

Jamie Gonzalez is a Senior Financial Advisor at Max Cash. Her years of experience providing financial advice and support make her an expert in the field and a valuable contributor to the Max Cash blog.