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What is an APR
You may have seen the term APR, or annual percentage rate, used in reference to everything from mortgages and auto loans to credit cards. In this piece, we look at credit card APRs—which you’ve probably seen listed on your monthly statements. Knowing what an APR is, how it’s calculated and how it’s applied can help you make more informed credit card decisions.
About APR
Technically speaking, APR (annual percentage rate) is a numeric representation of your interest rate. When deciding between credit cards, APR can help you compare how expensive a transaction will be on each one. It’s helpful to consider two main things about how APR works: how it’s applied and how it’s set.
Applying APR
Generally, credit card companies offer a grace period for new purchases. If you only make purchases and pay off your ending balance each month by the due date, you pay just the amount you owe with no interest. However, if you opt to carry a balance on your card, you pay the agreed-upon interest on your outstanding balance.
Setting the APR
Many variable interest rates start by using an index, such as the U.S. Prime Rate, as published by the Wall Street Journal, and then add a margin. The result is the APR. Note that variable rates can change if the index changes. Additionally, some banks offer a non-variable APR as well.
Calculating what you owe
Banks use a formula to determine how much interest you pay on your outstanding balance. They calculate it using a daily or monthly periodic rate, depending on the card.
Keep in mind some accounts have multiple APRs, so this calculation may be applied for each one. The statement gives you more information about how to calculate the balance subject to interest rate.
Types of APR
There are different APRs based on how you use your credit card. When you’re selecting a credit card, it’s a good idea to consider these rates in addition to your credit needs.
- Purchase APR: The rate applied to credit card purchases.
- Cash advance APR: The cost of borrowing cash from your credit card tends to be higher. There may be a different APR for balance transfers, checks or certain types of cash advances. Cash advances do not have a grace period.
- Penalty APR: Usually the highest APR. It may be applied to certain balances when you violate the card terms and conditions like failing to make payments on time.
- Introductory APR (or promotional APR): Features a lower APR for limited time period. It can apply to specific transactions, such as balance transfers, cash advances, or a combination of the two.
APR and the cardholder
Before you get any credit card, keep in mind:
- The APR can help you evaluate all offers and promotions.
- Lenders cannot change the APR for the first 12 months, unless it’s tied to a promotional or variable rate, or if the terms and conditions are violated.
- Consumers should review terms and conditions, including the APR, before using their cards.
- In most circumstances, companies must give 45 days advance notice of any changes to the APR.
Remember, while APR is important, it’s just one of the factors to take into account when choosing a credit card.
The material provided on this website is for informational use only and is not intended for financial or investment advice. Khan Academy assumes no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.
Khan Academy doesn’t provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Want to join the conversation?
What is the difference between purchase APR and cash advance APR?(7 votes)
If I go to a store and buy groceries, and pay with my credit card, then that is a "purchase".
If I go to the ATM with my credit card and get out the cash, then that is the cash APR.
When I get my monthly credit card bill, as long as I pay it within the time limit (mine is about 3 weeks), then I pay no interest on the purchases. But interest is charged on the cash from the day I took it out of the ATM.
We (my wife and I) regularly use our credit cards for store purchases (groceries, fuel, and such like), but always pay the bill by the time allowed, so we pay zero interest. But if we went to the ATM, took out the cash, and then made the exact same purchases, we would be charged interest from the day we took out the cash, even if we settle the bill when due.
Hope this helps.(22 votes)
how much money can you make interest on the credit account(5 votes)- It is difficult to make money, but look up "stoozing".
In general though, because we settle our credit card bill in full every month, we effectively make the interest we got from keeping the money in our bank account for the equivalent of about a month, then transfering it to pay the credit card. If you make 1% a year on your credit card balance you are doing well.
the main "perks" to using a credit card are that it is just one bill (so effectively an "account card"), and that you may get some sort of reward scheme for the credit card (0.5% off future grocery purchases is the reward for ours). But if you ever fail to settle the credit card bill every month, the the cost of the interest the bank charges dwarfs the reward scheme ...)(3 votes)
How is an APR calculated?(3 votes)- If I go to a store and buy groceries, and pay with my credit card, then that is a "purchase".
If I go to the ATM with my credit card and get out the cash, then that is the cash APR.
When I get my monthly credit card bill, as long as I pay it within the time limit (mine is about 3 weeks), then I pay no interest on the purchases. But interest is charged on the cash from the day I took it out of the ATM.
We (my wife and I) regularly use our credit cards for store purchases (groceries, fuel, and such like), but always pay the bill by the time allowed, so we pay zero interest. But if we went to the ATM, took out the cash, and then made the exact same purchases, we would be charged interest from the day we took out the cash, even if we settle the bill when due.
Hope this helps.(3 votes) - What card companies have the lowest apr(2 votes)
Chase, Wells Fargo, Citi, Bank of American and Discover it(2 votes)
- No question on this one(2 votes)
- What is the difference between purchase APR and cash advance APR?(2 votes)
- What is the difference between purchase APR and cash advance APR?(1 vote)
- hat is the difference between purchase APR and cash advance APR?(1 vote)
What's the good amount of time to go through and check everything?(1 vote)
