Financial Education

What is APR: annual percentage rate explained

Get a quick overview of what APR is. How to get a low annual percentage rate, and how it affects your monthly payment.

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Learn what your APR means and why it matters to you

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Annual percentage rate explained! Source: Adobe Stock

When considering taking a loan or applying for a credit card, it’s essential to understand all the details involved. And at least once, you might have wondered: What is APR?

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This article will explain what APR is and how it affects your finances. You’ll start making better decisions about your debt by understanding the basics. So keep reading to learn more!

What is APR and how does it work?

The Annual Percentage Rate, or simply APR, is the cost charged for borrowing money. When it comes to credit cards, it refers to the annual interest rate you’ll pay for carrying a balance. 

The APR will include interest rates and any associated fees and costs when talking about mortgages or loans. 

Most credit cards won’t charge an APR if you make your monthly payments on time.

Some cards will offer variable rates so that they can go up or down from time to time.

In addition, they can also offer a 0% intro APR period for new credit card applicants.

How is APR calculated?

The banks use a formula to determine how much interest you will pay for outstanding balances.

They consider the Prime Rate, which is the interest rate for lending products, plus a small fee called margin. 

Issuers usually will determine the APR daily or monthly. The current economic condition can also impact the prime rate, which might go up or down.

Then in case you want to know deeply how the APR you’re paying for is calculated, take a look at your credit card terms.

Once you know how your card’s APR works, you can calculate your daily rate. In simple words, divide your APR by 365 days. The result will be your daily rate.

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What is a good APR?

In general, a good APR is a lower one. Nowadays, the average credit card APR is 16.65%. However, remember that your creditworthiness will determine it.

The 0% APR is the best offer you can get, but it is usually only available for a set period. Most credit cards offer a 12-month introductory APR period, but you’ll pay the ongoing APR after that.

What factor can affect your APR?

Some factors will determine what APR you’ll get! Some of the most important are your credit score, credit history, and credit activity.

For example, cardholders with a higher credit score are more likely to receive lower APR. 

The terms and conditions of your credit card will have a great impact, too, since the rates can be calculated daily in case of a variable APR. 

What is the difference between fixed and variable APR?

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Learn what your APR means and why it matters to you! Source: Adobe Stock

APRs can be determined as fixed or variable. The difference between the two definitions is simple:

Fixed APR, as the term might suggest, does not vary over the life of your loan.

With a fixed APR, you’ll know exactly what to expect from your rates since they won’t change. It will be easier for you to set your budget.

Variable APR is usually linked to the prime rate. So if this number increases, the variable APR will go up! And if it decreases, logically, the APR will fall too.

Differently from the Fixed APR, the Variable one is unpredictable. This is one thing to remember if you want to set a budget.

Different types of APR

Credit cards have more than one APR. So it would help if you kept a close eye on your credit card rates and what you’re paying for. Let’s take a look at the different types of APR below.

Cash Advance

It stands for the costs of borrowing cash from your credit card.

The Cash Advance might also be charged in other kinds of transactions, such as dollar exchanges for foreign currency and purchasing lottery tickets, for example

Unlike purchases, there is no grace period, so the interest rates will start computing as soon as you withdraw the money.

Purchases

The Purchase APR, as the name suggests, is the rate applied when you make purchases with your credit card.

Penalty

If you break the terms of your card’s contract, your credit card’s APR will increase for a set period.

So remember always to check your card’s terms. Also, try to stay on top of your bills, making your payments on time.

Introductory or Promotional APR

That’s a good quality to look for on a new credit card. They usually offer lower APR for specific transactions, such as balance transfers and cash advances.

It is available for a limited period. Twelve months is the most common introductory period.

How to get lower APR on credit cards?

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Learn how to get lower APR on credit cards! Source: Adobe Stock

One of the most important facts determining your annual percentage rate offer is your credit score. People with good scores are more likely to qualify for the lowest rates. 

So remember to always stay on top of your finances since every move can and will be displayed on your credit history.

You can start by using your credit responsibly, avoiding exceeding your credit limit, and paying your bills on time.

Also, it would be best if you remembered to shop around before applying for any credit product. Pay attention to the details before choosing which fits you best.

If you want help to maintain or achieve a better credit score, keep reading. In the following article, we have some great tips for you!

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About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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