You may have seen the term “APR” while shopping for auto loans, mortgages or credit cards. It stands for “annual percentage rate” and describes the yearly cost of carrying an unpaid balance in a variety of borrowing contexts. So what does an APR mean to credit card applicants, and how does one know a good APR when they see one? Here we cover the different types of credit card APRs, how to compare them and what else to keep in mind when evaluating credit card interest rates.
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What Is APR on a Credit Card?
APRs represent an important point of comparison among credit cards, as a card’s APR helps determine the cost to the cardholder of falling behind on payments. With a majority of credit card account holders in the U.S. carrying a balance, APRs impact a lot of credit card users.
Interest Rate
Interest is one of the costs of borrowing money. When someone borrows, it’s not only the principal, or the original loan, that must be paid back. In order to incentivize the lender to lend in the first place, the profit the lender wants to make and the cost of the lender’s overall investment risk are also, in essence, repaid. An interest rate describes how much the lender values this service or risk as a percentage of the principal.
A credit card user begins borrowing money as soon as they swipe, but credit card interest rates don’t kick in until after the due date at the end of the card’s billing period. In other words, “carrying a credit card balance” is not simply having a credit card bill to pay at the end of the month—rather, it means the cardholder has not paid off a bill in full or at the time it was due and carries debt from one billing period into the next. For cardholders, that’s when the cost of borrowing begins to skyrocket and when the card’s interest rate can have a major impact.
Annual Percentage Rate
An APR is a common way to express the interest rate incurred by carrying a credit card balance. Just like any interest rate, lower APRs are generally considered more desirable. APRs are an “annualized” expression, meaning they describe interest rates on a yearly basis—even though interest is often calculated and compounded on a daily basis. This makes them useful as a common denominator of sorts for comparing the wide variety of credit card offers one will encounter.
One challenging aspect of understanding how to calculate APR is how interest compounds. Interest is calculated based on the principal and the accumulated interest from previous periods—not just the principal alone.
APR is the most common—and perhaps the most useful—way to compare interest rates among different credit cards, even though the figures are somewhat limited in immediate practical application since you can’t necessarily just multiply the amount you want to borrow by the APR and understand immediately how much you’ll pay.
Those who settle their credit card bill in full and on time each month can avoid concerning themselves with APRs almost entirely, though APRs are still important figures for all cardholders to understand in the event interest accrues.
How Credit Card Companies Determine APRs
The APR assigned when opening a credit card is determined not only by an applicant’s credit score or credit report but also by the U.S. Prime Rate. The Prime Rate is a figure used by major financial institutions to set interest rates on loan products. To come up with credit card interest rates and corresponding APRs, lenders start with the Prime Rate and tack on additional margins in the form of interest to mitigate the risk of default and to profit on unpaid balances.
As of January 2024, the current U.S. federal Prime Rate (reported as the “bank prime loan” by the Federal Reserve) is 8.5%. For borrowers with strong credit, an APR based on the current Prime Rate (8.5%) plus a lender’s margin of 10%—totaling a 18.5% APR—might be typical for a new account. To contrast, a borrower with poor credit may pose a higher risk and therefore receive an APR that factors in a lender’s margin of 20% for a high APR of 28.5%.
In addition to a borrower’s creditworthiness and the Prime Rate, lenders also examine the prospective borrower’s financial records such as payment history, credit report and debt-to-income ratio (DTI) to determine an APR. Credit cards offering rewards like points, miles or cash back on purchases tend to charge higher APRs compared to non-rewards cards.
Types of Credit Card APR
A majority of credit card companies offer products advertising one of several different types of APR. When reading the terms and conditions of a credit card—something everyone should do before applying—you will also likely notice the wide range of APRs. Many credit cards have variable rates and understanding the different types of APRs offered is important to evaluating card options.
Some of the most common types of credit card APRs include:
- Purchase APR: The rate applied toward new purchases on a credit card that are not paid in full by the due date and are carried forward into the next billing cycle. This is the most commonly-encountered type of APR for credit card users and is what people are conventionally referring to when they mention credit card APRs.
- Introductory APR or promotional APR: A lower rate (sometimes as low as 0% APR) offered to new customers for purchases and/or balance transfers on a limited-time basis. Introductory offers can last from six months up to 20 months or more, after which the APR will increase to a variable rate based on cardholder creditworthiness.
- Balance transfer APR: The rate applied when transferring an existing debt balance on one credit card account to a different card account. A balance transfer from one card with a high APR to a lower-rate card can be a smart way to eliminate debt quickly.
- Cash advance APR: The rate for using a credit card to withdraw cash from an ATM or bank. The APR on cash advance transactions can be exorbitant and we do not recommend using a credit card for these transactions. Certain other transactions can be categorized as cash advances.
- Penalty APR: The rate applied to a card account when the cardholder fails to make payments in full or on time, violating their agreement. Penalty APRs are part of why credit card overspending can be so dangerous, as they may reach higher than 29.99% when a payment is at least 60 days late. Interest rates this high would be unthinkable in most other common lending contexts.
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How To Compare Credit Card APRs
To say APRs are highly variable is an understatement, which makes it hard to settle on one single, numerical answer to what constitutes a “good” interest rate. APR values by nature are relative figures, so their greatest utility is in comparison.
Banks typically offer credit card APRs in the range of 19% to 28%. According to the Federal Reserve’s most recently available data as of November 2023, the average interest rate for U.S. credit cards’ assessed interest is 22.75% on all accounts. To determine if a specific credit card has a good APR, these figures offer a general point of reference.
Generally, the higher someone’s credit score, the better their chances of scoring an interest rate on the lower end of the range. Conversely, the lower the credit, the higher the anticipated APR. In the big picture, credit card APRs are high compared to those involved with other types of loans, so cardholders should exercise caution even when a credit card APR seems relatively low. Understanding APR helps reveal how inefficient credit cards often are as a way to borrow money for more than a short period of time (one billing cycle, at most).
What Is a Good APR for a Credit Card?
The lower the APR, generally the better it is for the cardholder. Though we recommend against carrying a credit card balance, advancing cash or doing anything else to incur interest fees, a relatively “good” APR can reduce the impact in the event of the unexpected. An APR below the national average can be considered a “good” APR.
Cardholders planning a large purchase who wish to carry a balance over a relatively short period of time should consider a 0% introductory APR credit card if able. Cards offering 0% promotional rates provide time to pay off bills without incurring any interest charges. Keep in mind that following the introductory period, the APR reverts to a variable rate based on creditworthiness, so only do this if you’re secure in your plans.
On the other end of the spectrum are credit cards with unusually high APRs marketed toward consumers with subpar credit scores who would otherwise struggle with approval for a credit card. It’s not unheard of for these cards to have a variable APR over 25%. These products are advertised as helpful for trying to build credit, and some people may take it as the only option. This is one example of “bad APR,” as carrying a balance at a 25% APR can easily create a cycle of consumer debt if things go wrong and leave the cardholder worse off than when they started.
How To Qualify for a Good APR
While many factors are used to determine APR, the first detail any lender will want to know is if the applicant’s payments on previous accounts have been made on time. Payment history makes up 35% of a credit score and remains the most important factor when a lender determines overall creditworthiness. Lenders are more likely to issue a lower APR to those with a long-established history of paying bills on time.
An applicant’s credit utilization ratio also makes up a large portion (30%) of a credit score. The credit utilization ratio is calculated by taking the total amount owed and dividing by total credit limit. Customarily, a good credit utilization ratio remains below 30%—on each individual card and across all accounts. Staying within this utilization limit and reliably paying off balances are some of the best ways to qualify for a lower APR.
One savvy approach to securing a good APR on a credit card is to consider applying for one with an introductory or promotional offer. Banks will routinely offer 0% introductory APRs on purchases and balance transfers with terms lasting from six months to nearly two years. A credit card with a 0% APR introductory rate is a viable option for those looking to finance a large purchase or who need to pay down debt from a high interest credit card. Be mindful that once the 0% promotional period expires, the APR will increase to the card’s standard variable rate.
Cardholders may also consider negotiating a lower APR directly with a bank. If they can show that they make timely payments and a credit score has gone up in their time as a customer, they may be able to get the bank to evaluate a lower interest rate—simply asking doesn’t hurt. Cardholders should mention any other cards they may have been preapproved for with lower APRs to provide further incentive to the bank, which likely wishes to retain customers.
What To Expect From Cards With High APR
Credit cards with higher APRs may offer perks like cash back, frequent flier miles or transferable points, but not all credit cards with high APRs provide generous rewards. The type of high-APRs cards for people with poor credit (or who may otherwise be deemed too risky by the issuing bank) don’t tend to have strong rewards programs.
Cardholders who never miss a payment and never carry a balance won’t ever have to pay the higher APRs generally associated with rewards credit cards. In these cases, the rewards can be a worthwhile perk.
People who are planning to finance a purchase with a credit card and people who sometimes miss credit card payments should try to avoid high APR credit cards offering rewards; what may be earned in rewards will be tiny in comparison to the interest charges incurred by high-APR credit cards.
What To Expect From Cards With Low APR
Lower APR cards tend to have fewer perks and few will offer some of the most popular rewards like high cash-back earnings or bonus miles—but if a cardholder carries a balance, it won’t charge nearly as much interest. These cards may also not be marketed as heavily as cards with popular rewards programs, so it may take a little longer to research low-interest credit cards.
Credit cards usually charge balance transfer fees, including for 0% introductory APR offers, though some cards don’t charge a balance transfer fee within the first few months of card membership. Be sure to consider and calculate the cost of balance transfer fees if you are contemplating transferring a balance to a credit card with a 0% introductory rate.
How To Lower Your APR on Your Credit Card
There are a number of ways cardholders can get a lower APR. The best way to lower APR is to build and maintain a high credit score. This provides increased opportunities to qualify for 0% introductory APR promotions or low-interest cards and also puts you in a better position to negotiate a better rate. Paying bills on time, applying for credit only when it’s actually needed and maintaining a low credit utilization ratio are some of the best ways to achieve a high credit score.
You can also shop around and see if credit card issuers offer a 0% introductory APR period you may be able to qualify for. If you do qualify for some of these promotions, you could transfer an existing balance from another card for a fee and avoid paying interest entirely by paying down the debt before the end of the low introductory APR period.
Those who don’t directly qualify for 0% introductory cards or frequently carry balances may want to see if there are lower interest cards available with an existing lender or financial institution. Alternatively, home equity lines of credit, personal loans or other financial products may offer better rates than a credit card for managing debt. In general, we recommend treating credit cards simply as a convenience for cashless payment and turning to other, more cost-effective forms of borrowing if your focus is mainly accessing a line of credit.
You can try reaching out to a credit card company directly in an effort to negotiate a lower rate. When doing this, first evaluate your credit history and anticipate the lender’s perspective—it may provide a better idea of what types of offers the lender will present and help you to better prepare to negotiate a better rate.
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Bottom Line
Understanding how APRs work is important to developing a complete picture of your card options and the best practices you can use to build and maintain credit. The more knowledge you as a consumer are equipped with, the better you’ll be at comparing diverse credit card offers and evaluating which is best for your financial situation. APRs represent only one aspect of making informed decisions about credit cards, but they can have major implications for managing financial health.
Frequently Asked Questions (FAQs)
What is variable APR on a credit card?
Variable APR, as opposed to regular “fixed APR,” is expected to fluctuate to reflect changes in an index (a fixed APR may also change over time, but there are more restrictions). With credit cards, variable APRs are usually adjusted in line with the Prime Rate described above.
Can you avoid APR on your credit card?
Yes, it’s possible. Even cardholders with a high APR on their credit card can sidestep ever having to deal with interest rates if they never miss payments because most credit cards offer grace periods during which interest is not charged if a balance is paid down.
Beware the end of 0% introductory APR periods—the card’s standard variable APR will apply to all balances when a promotional introductory APR period ends, so if you want to avoid interest, aim to pay down your balance before the end of the promo period.
Which are the best 0% APR credit cards?
There is no one “best” credit card as the card you choose should reflect your own financial situation, lifestyle and goals. We recommend checking out our list of the best 0% APR credit cards if you’re seeking a card with a low APR for a limited period of time.
