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Understanding the Different Types of Credit Card APRs

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It’s no surprise credit cards can have numerous fees, but did you know there are also multiple interest rates?

The annual percentage rate (APR) is the interest rate charged by banks on credit cards. This is a cost that’s charged to credit card customers for borrowing the bank’s money and one way how financial institutions make their money from credit cardholders.

When you use a credit card, actions you take are subject to up to five different types of APRs. You may incur one, all or none of these APRs, depending on whether you pay the entire balance during the grace period, make a new purchase, transfer a balance, miss a payment or use your card for a cash advance.

While all these APRs may sound confusing, once you understand which APR applies to the various actions you take, it is relatively simple.

How does a credit card APR work?

Your regular credit card purchase APR is set by the issuer once you’re approved for a new credit card. It’s the interest rate you will be charged for borrowing funds, which is broken down into a daily rate.

You can avoid interest charges entirely if you repay what you owe by the statement due date or within the card’s grace period. However, if you only pay a portion of the balance, or use the card for a cash advance (where there is no grace period), interest will be assessed and added to what you owe.

Here’s how to calculate your regular purchase APR, using an example of a credit card with a 18% variable APR, 30-day billing cycle and a $1,000 balance on the card each day. This can help you determine what you’d be charged in interest if you don’t pay your bill in full.

1. Convert your annual interest rate to a daily rate Credit card interest is calculated on a daily basis, so you’ll need to convert the APR to a daily rate by dividing your APR by 365.

For example: 18% / 365 x 100 = 0.049% daily interest rate.

2. Figure your average daily balance This can be done by taking the total balance from each day of the billing cycle and dividing that by the total number of days in the billing cycle. Then, multiply that amount by the total number of days in the billing cycle.

For example, if you have a $1,000 balance each day of a 30-day billing cycle, your average daily balance will be $1,000.

3. Calculate your monthly finance charge Multiply your average daily balance by the annual percentage rate and the number of days in your billing cycle, then divide that amount by 365 days.

For example: (($1,000 daily x 18% APR) x 30-day billing cycle) / 365 days = $14.79 in interest charges for one billing cycle, which will be added to your balance and minimum payment if you don’t pay if off during the grace period.

The interest will then be recalculated and assessed every month on your average daily balance until it hits $0.

Currently, the average purchase APR for new cards is 15.78% for existing accounts and 19.28 for new credit card accounts, according to recent LendingTree statistics. Let’s review the different types of APRs, where you can find your card’s APR and how you can avoid paying any interest altogether.

The different types of APRs

There are five different types of APRs you may incur when using a credit card.

Depending on the actions you take with your credit card, these interest rates may inflate your balance a little or a lot, depending on how quickly you pay off your balance. When you understand how the following APRs can come into effect, you can potentially avoid all interest charges.

Purchase APR The most common APR associated with a credit card is the purchase APR. This is the interest rate you’ll be charged for new purchases made with your card that are not repaid in full before the end of the card’s grace period — the amount of time between the end of a billing cycle and when your bill is due.

Balance transfer APR A balance transfer APR applies to any balances that are transferred from one card to another. Unlike the purchase APR, the balance transfer APR is charged from the date you make a transfer and there’s no grace period, unless associated with an introductory APR (explained below).

It’s common for banks to charge the same APR for both balance transfers and purchases — though you should always check, as it may differ on some cards.

Introductory APR Many credit cards offer intro periods where you can benefit from a low or 0% APR for a given time period. With these cards, you can carry a balance without incurring interest charges for a certain time frame, as long as you make the required minimum payment each month.

For example, you may get a card offering an intro 0% for 12 months on new purchases or an intro 0% for 15 months on balance transfers. If you take advantage of these offers, you won’t be charged interest during the 12 or 15 month terms. However, any balance left on the card after the intro period expires will begin to incur interest at the standard purchase and balance transfer APR.

Note that if you don’t pay off your balance in full before the intro period ends, some cards (typically store cards) will charge you all the interest accrued since the purchase or balance transfer date — otherwise known as deferred interest.

Cash advance APR A cash advance is when you withdraw cash from your credit card’s line of credit. The cash advance APR is often significantly higher than your purchase or balance transfer APR. There is also typically a cash advance fee and no grace period. We don’t recommend taking out a cash advance for these reasons, unless it’s an emergency and you can repay the advance quickly.

Penalty APR: When you miss a payment or pay late, many cards will jack up your APR to a new, higher rate. In addition to an increased APR, you risk termination of any intro 0% APR offers and damage to your credit score. Plus, the penalty APR has the potential to apply to your account indefinitely if you are repeatedly late with payments.

However, the CARD Act of 2009 requires credit card companies to restore your regular purchase APR if you make consecutive on-time payments during the six months after the date the penalty APR is imposed — all the more reason why you should always pay at least the minimum due on time. Autopay is a helpful feature that can help keep you on top of timely payments.

Variable APR vs. fixed APR

Credit card APRs nowadays tend to be variable, meaning they rise and fall with the prime rate. So when the prime rate increases (or decreases), so will your variable rate credit card APR.

However, there are some cards out there that offer a fixed APR, which do not fluctuate with the prime rate. If you have a card with a fixed interest rate (which is less common and often found from smaller banks and credit unions), your interest rate shouldn’t change — unless, of course, you misuse the card and incur a penalty APR.

Where to find your credit card’s APR

The easiest way to find your APR is by logging into your bank’s mobile app or website. It’s listed either with your account or on your most recent statement — though if you still can’t find it, you can always call the number on the back of your card to ask.

You can also consult the terms and conditions of your credit card agreement, which was mailed with your card. The APR will usually be found on the first page, in a table titled “Interest Rates and Interest Charges.” You’ll see the APR next to a description of what kind of transaction is subject to that particular APR.

If you’re online and thinking of applying for a credit card, you may have to look pretty hard to find a section, tab or website link labeled “Terms and Conditions,” “Rates and Disclosures” or “Pricing and Information.” Once you find the link, navigate until you find the interest rates and interest charges table.

It’ll look something like this:

Annual percentage rate (APR) 14.49% to 25.49%, based on your creditworthiness.
These APRs will vary with the market based on the Prime Rate.
APR for balance transfers 14.49% to 25.49%, based on your creditworthiness.
These APRs will vary with the market based on the Prime Rate.
APR for cash advances 26.24%
This APR will vary with the market based on the Prime Rate.
Penalty APR and when it applies Up to 29.99%, based on your creditworthiness.
This APR will vary with the market based on the Prime Rate.
How to avoid paying interest on purchases Your due date is at least 23 days after the close of each billing cycle. We will not charge you any interest on purchases if you pay your entire balance by the due date each month.

You may notice that many cards offer an APR range from low to high. The conventional thinking is that the better your credit score, the lower the APR you’ll qualify for, but that isn’t always the case.

Unfortunately, you won’t really know what your new card’s APR will be until you are approved. If your credit score isn’t the greatest, know that you’ll most likely be offered an APR closer to the higher end of range.

How to avoid interest charges

Regardless of what the APRs associated with your credit card may be, it’s possible for you to use the card without ever having to pay any interest charges. The key is to always pay off your balance in full and on time. You’ll typically receive a grace period, where your balance won’t be charged interest for at least 21 days. By paying your bill within the grace period, you can avoid paying interest charges altogether.


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