What Is APR (Annual Percentage Rate)?

Annual Percentage Rate

Annual Percentage Rate

The annual interest rate or APR is the interest rate charged on credit card balances. The APR is applied every month when there is an outstanding balance on the credit card.

This is the compound rate that is used to make a standard comparison of the level of interest that you are likely to pay on loans or credit card balances.

A simple way to understand the APR is to think it is the same as the number of cents per year that you have to pay for each dollar you borrow. If you borrow money at an APR of 10%, it means that you will pay 10 cents a year for every dollar you owe.

How does the APR of credit cards work?

The interest charges on the credit card do not apply from the moment you make a purchase. In fact, you can avoid interest charges altogether by cancelling your invoices in full in each billing cycle.

  1. When you open a new credit card account, the creditor assigns you an annual percentage rate based on your credit score.
  2. However, most credit cards have variable interest rates. This means that the rate of your account may change if the Federal Reserve changes its reference rate. When the Federal Reserve increases rates, the rate of your credit card can almost certainly follow that rising trend, even having good credit.
  3. Interest charges only apply if you begin a billing cycle with an outstanding balance.
  4. Even if you pay the full balance in that billing cycle, the interest charges still apply for the balance you carried throughout the billing cycle.
  5. In most cases, a creditor multiplies the periodic monthly interest rate by the “average daily balance” it has.
  6. Therefore, if you start a billing cycle at zero and end it at zero, your average daily balance will be zero; not paying interest, as a result.
  7. On the other hand, if you start a billing cycle with a balance and end it with a balance, the creditor multiplies the periodic interest rate by the average daily balance to determine the accrued interest charges.

Note that this only applies to interest charges on regular purchase transactions. These are the regular charges you make with your credit card. Other specialized actions usually have a specialized APR.

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