Credit cards, interest and annual interest: everything you need to know

When you borrow money, whether it’s a credit card or other form of financing, you usually have to pay interest to the lender. In the case of credit cards, the cumulative interest rate you will pay on a given balance for a full calendar year is called the Annual Percentage Rate (APR).

You may have seen this term on your monthly credit card statement but didn’t quite understand what it meant. Unlike the interest rate, APR includes the interest and fees you pay to borrow money. There are different types of APR, and the amount of APR you pay may depend on both your credit score and when you pay off your credit card balance.

Read on to find out exactly what APR is, how it works, and how to minimize interest payments.

What is APR?

The annual percentage rate (APR) is the interest rate you pay to borrow money. For credit cards, your APR is the price you pay to have a balance on your credit card. The annual interest rate is expressed as a percentage and is the sum of the interest and other fees you pay on the card for the entire year.

APR types

There are different types of APR ̵

  • one; depending on the type of transaction. Here is an overview: Introductory APR: Many credit cards have starting APRs that are lower than regular card APRs. Introduction The annual interest rate can be as low as 0% but only for a limited time.
  • Buy APR: This annual percentage applies to purchases you make with a credit card during the month that don’t pay off by the due date.
  • Effective annual balance transfer interest rate: ONE offset transfer when you transfer the balance from one credit card to another, often to take advantage of a low initial price. When the opening price ends, the transfer of your balance will be subject to your own APR, which is often higher than the APR for the purchase.
  • Cash advance per year: A cash advance is when you take money from your credit card balance in the form of a loan. Credit card cash advances often carry a higher annual interest rate than purchases.
  • Penalty rate APR: If you violate any terms of your credit card, eg. B. If you miss a payment due date, you may be charged an annual interest rate in excess of the annual interest rate of your purchase.

Annual Interest Rates vs. Interest Rates: What’s the Difference?

Many people use the terms APR and interest rate interchangeably, but your APR and interest rate are two different things. The APR is often an interest rate combined with other funding costs.

But with credit cards. The annual interest rate and the interest rate are indeed the same. Whether a credit card advertises its interest rate as an interest rate or an annual interest rate, it’s the same thing. All other fees such as annual fees and transfer fees are calculated separately from the APR.

Fixed vs. Variable APR: What’s the Difference?

As with any other type of financing, credit cards may have a fixed or variable annual interest rate.

A fixed-rate credit card has the same annual interest rate for the duration of the card. This type of APR can be beneficial, especially when interest rates are low, as it allows you to lock in a low-interest rate for the life of the credit card. They are not vulnerable to higher rates when the economy changes.

A credit card issuer can still change the APR on a fixed-price card, but it’s more difficult. You must meet certain requirements, including proper notice to cardholders.

A variable-rate credit card is a card with an annual interest rate linked to a specific index – often the base rate. As the prime rate fluctuates, so does the annual interest rate that credit card issuers are willing to offer their customers.

While it is possible to find a fixed rate credit card, most credit cards have an adjustable rate. If you prefer a fixed-rate credit card, you should probably look elsewhere than the major credit card issuers. Instead, contact credit unions and local banks, who are more likely to offer fixed-rate cards.

Here’s How APR Works

The APR usually applies to purchases and balances that you don’t return. At the end of each billing cycle, your credit card issues a monthly statement. After invoicing, you have a grace period—usually around 21 days—during which your purchases will earn no interest.

Any purchases on your card that you do not pay by the due date and at the end of the grace period will earn interest. To calculate interest, banks use a recurring daily rate equal to your annual interest rate divided by 365. For example, with an annual interest rate of 20%, your recurring daily rate is 0.05479%.

To calculate the actual amount of interest you owe, divide your recurring daily rate by the number of days in your billing cycle, and then multiply that rate by the amount on your credit card balance that is paying interest.

Here’s what the annual interest rate can cost you

Credit card fees are among the highest of any type of financing. It’s easy to fall into the trap of accumulating credit card debt, not paying for your purchases by the due date, and then finding that most of your monthly payments go towards interest in the future.

According to LendingTree, the average credit card balance at the start of 2021 was $6,569. If you had a credit card with a 16% annual interest rate and only made minimum payments, you could pay over $8,200 in interest over the life of the card. This is more than the amount you actually borrowed.

“Credit card rates can seriously impact a consumer’s ability to pay off debt if they’re not careful,” said Shante Nicole, credit counselor and founder of Financial Common Cents. “It’s critical to control your spending and make sure you have the funds to pay back what you’ve borrowed when the bill comes due and not be dependent on minimum payments to keep you afloat. Each month, the balance is carried forward after the due date, interest accrues, which can lead to much more debt than the borrower intended.”

The faster you pay off your balance, the less money will be available for interest, and the less interest you will pay over the life of the debt. Ideally, you pay off the balance in full to avoid interest entirely, but if you can’t pay more than the minimum, you lower your interest expense.

“Credit cards should only be used for things you already have money for,” Nicole said. “So you are guaranteed never to pay interest. Once you have borrowed money for a purchase, you pay in full on the due date. No balance will be carried over and no additional fees will be paid.”

What is a good APR?

According to, the average credit card rate in the first week of February 2022 was 16.13%. You can use this number as a guide to determine if the price is reasonable.

Keep in mind that while the average rate might be 16.13%, that doesn’t mean it’s a rate that everyone can qualify for. Generally, the annual interest rate you are eligible for with a credit card or other form of financing depends on your creditworthiness.

In general, the best APRs are reserved for those with good credit. For borrowers with a lower score, the average rate is significantly higher at 25.80%. One of the best ways to do this is to reduce the amount you spend on interest – In addition to paying the full balance monthly, this should improve your credit score.

Direct deposit of news and tips to help you make the wisest decisions with your money.