If you are a credit card user then you must be aware of the term “APR”. But do you really know how it works and how it can be calculated. Though APR is often mistaken as interest rates, it is not always the same. Annual Percentage Rate is associated with various types of loans and mortgages.

This rate may vary depending on the type of credit product that you have chosen. In the case of credit cards, both interest and APR work almost similar. Credit cards come with different APRs. This should be determined by you in order to understand the amount that you will owe.

The reason why you must pay attention to APR is because it is the cost that you are paying on any debt. So, only when you are fully aware of how much you owe, you can prevent high APR debts. Read this article for more in depth information related to this rate.

When you may come across APR?

Whenever you are dealing with credit, you will encounter this very term. There could be credit products which have one APR while there could be other forms of credits which charge multiple APRs. Although all the information related to APR is generally shared with borrowers like you, it is always safe to take a look at the various APRs that are charged.

At the same time it is of utmost importance to understand what could be the effects of APR. Based on the rate of interest that is determined by the lender the APR is decided. However, there are a number of factors which play a vital role in determining the rate of interest.

Credit scores have an effect on the interest rate. So, one with a stellar credit profile will automatically be eligible for a lower rate of interest leaving behind someone who does not have favorable credit scores. By drawing comparisons one can try to spot the most suitable offer with best rates.

The type of credit that you choose will also affect APR. If you compare credit cards and mortgages, the first one will have higher APR than the second option. Similarly, you can spot the difference while shopping around for APRs within the same credit type.

To understand factors that affect APR read along this page https://www.capitalone.com/learn-grow/money-management/what-is-apr/

In a nutshell, your credit activity, credit scores and credit history will have a combined effect on the amount of APR that is decided. Get a clear picture about rates charged by going through the terms and conditions carefully. You need to be careful regarding your future purchases as this can cause an increase of rates over your existing balance. However, if bills that are to be paid back are due for more than 60 days then APR on the existing balance might also increase.

In what ways APR can be calculated?

APR is applied for whatever credit type you are going for. Depending on the type of financing option that you choose an APR could be either fixed or variable. In some cases, the variable rate that is applied on credit cards depends on the prime rate including the additional margin. Economic conditions are often responsible for fluctuation of prime rate.

One need not have to bother about the margin that is applied as this will remain constant throughout the borrowing process. However, the APR would vary if the prime rate varies. It should be noted here that the overall rate will be determined by the margin and the prime rate that is applied. The margin is basically a small fee that is charged by the credit card issuer and varies depending on the type of credit.

The APR rate will not vary if you have opened a credit card with a fixed APR. When talking about fixed APR you must know one thing that credit scores will play no role. The card issuer is bound to send a written notice prior to changing the interest rate.

In case of a credit card, you can check interest rates in the monthly billing statement that you receive. Moreover, the internet has given the opportunity to check rates that are charged simply by logging into your account or by visiting the online application. You can even seek assistance from the customer care service provider if you are finding it difficult to check rates online.

You will not be charged APR for the first 12 months as a new user of a credit card. But it is important for you to review the agreement before heading to open a credit card. This rule is not followed in case of promotional or variable rates or if there is a violation of terms and conditions.

The formula to calculate APR has been explained carefully here https://www.creditkarma.com/advice/i/what-is-apr .

What are the different types of APR?

Although usually an APR could either be fixed or variable, there are different types of APR based on the type of credit you choose, the type of transaction you are doing and the financial institution that is offering you the credit. The different types of APR are:

Fixed ARP-

If APR does not vary depending on the index rate throughout the life of the credit product then it is called fixed APR. You can easily predict a fixed APR while budgeting. Mostly, loan options like mortgages and personal loans carry fixed APR.

Variable APR-

As the name suggests, the variable APR can vary and is calculated based on the interest rate that is the prime rate. This means if the prime rate changes then variable APR will also change. This change in rate can either go in your favor or against.

It is possible that variable APR which comes with lower interest rates upfront can rise due to increase in the associated index rates. This is the biggest setback of variable APR. This type of APR is most commonly offered with credit cards.

Cash advance APR-

Cash advance APR is charged when a cash advance is taken out from an ATM using the credit card. This is also a form of interest rate. Cash advance APR is usually charged high. The interest will start to accrue immediately once the cash advance is withdrawn and comes with no grace period. The APR charged for cash advances might be different from that charged for checks.

Purchase APR-

The interest rate that is applied on new purchases of goods and services by using your credit card is purchase APR. Usually this APR remains less than cash advance APR. With some cards you can easily avoid paying for extra interest incurred for purchases. This is possible only if you pay off the balance on your credit card every month on time.

Balance transfer APR-

Another type of APR is balance transfer APR. This is basically the interest rate which you will have to pay if you are using your credit card to repay debt with a different creditor. This rate is sometimes equal to or greater than the purchase APR. If you want to save money then you will need to transfer money to a lower rate credit card provided that applicable fees are manageable.

Penalty APR-

Penalty APR is usually charged if you make a late payment or if payment is missed. This rate of interest is essentially higher than the other regular forms of APR. The card issuer penalizes the card user with this APR in case of late payment or missed payment.

Penalty APR comes into picture when terms and conditions of the credit card are violated. Sometimes, lenders use this type of APR to motivate borrowers to keep up with payment. It should be noted here that this APR can cause an increase in the total cost of borrowing for the rest of the agreement.

Introductory APR-

There are credit cards which offer introductory APR for a given period of time. Sometimes, this APR is also offered as a promotional APR. The rate of interest charged is typically low or zero.

You can take advantage of this type of introductory offers to make new purchases, to do specific transactions like balance transfer, cash advances etc. You can save money on interest charges and can manage debts as well by making use of such promotional offers. But you should pay attention to credit cards terms and conditions. Also, you should not forget to review the regular APR in order to confirm if rates are affordable once the introductory offer ends.


If you want to make informed decisions then you cannot ignore APR. You can get a clear idea about how much you will have to pay at the time of borrowing by understanding APR carefully. Moreover, if you are looking for the best credit card then APR can help you choose between the various types of credit cards available around you.

For a credit card user determining APR is very important. Some credit card companies provide a grace period for new purchases. There will be no interest charged if the balance is paid off on time every month. However, if the balance is kept due then additional charges based on APR will be levied for that unpaid amount.

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