Credit card APR explained

Smiling man sitting in cafe, holding a credit card and typing on a laptop.Image: Smiling man sitting in cafe, holding a credit card and typing on a laptop.

What does APR mean?

APR stands for “annual percentage rate” and is a yearly representation of the costs involved in borrowing money.

You can run into APRs in the terms of your credit cards, car and personal loans. When you take out one of these loans, the APR typically includes fees and other expenses associated with borrowing money.

APR is advertised as either “typical” or “representative APR.” Both of these terms refer to the rate that at least 51% of those accepted for that loan product will get. Up to 49% of the remaining applicants may be charged a higher APR.

APR vs. interest rate

Your credit card’s interest rate and APR for purchases are one and the same. There are other APRs and fees associated with credit cards, such as annual fees or balance transfer fees, but those are not factored into the purchase APR. That’s because not every cardholder is going to incur fees.

Fixed vs. variable

When you’re shopping around for a new credit card, you may see APRs listed as fixed or variable. While most credit cards offer variable APRs, you may come across one that offers fixed.

  • Variable APR means that a card’s interest rate can change over time.
  • Fixed APR generally stays the same. This means that the card’s rate is not tied to an index. But that doesn’t mean your rate will never change — it just means the provider will likely need to contact you before raising the rate.

Different APRs for credit cards

There can be several types of APRs associated with any given card. It’s important to familiarise yourself with what they mean so that you understand what interest costs you could be charged with each card.

  • Purchase APR is the interest rate charged on purchases when you don’t pay off the card’s balance in full and on time each month. (Keep in mind that many cards have a grace period.)
  • Introductory APR is a special temporary rate that credit card companies may offer as a perk for signing up with a specific card. Some offer 0% introductory rates for a certain period on purchases, balance transfers or both. That could be an attractive feature, but just make sure you’re familiar with when, and how much, the APR will jump after that intro period.
  • Balance transfer APR is the interest rate charged on balances moved from one card to another. Some cards offer an intro 0% balance transfer APR for a set period of time, which could be worth looking into if you need to pay off credit card debt. You’ll be charged interest on any remaining balance after the intro period, so make sure you know when the introductory period ends.
  • Cash advance APR: Withdrawing cash on your credit card can be expensive. The interest rate for cash advances is generally higher than the interest rate for purchases. When you use your card to take out cash, interest is added to your account straight away — even if you pay off the balance by the credit card due date. With a purchase, you usually get an interest-free period. Additionally, you may have to pay a cash handling fee of about 2% of the total amount you withdraw.

How APRs are calculated for credit cards

A credit card has different APRs, and each is decided using different factors. When a provider approves you for a card, it offers you certain terms based on your creditworthiness, like the purchase APR. Your credit scores can be a key factor in how providers determine the APR you qualify for. Typically, the higher your credit scores, the greater the chance you’ll qualify for a lower APR. Remember, a credit card’s purchase APR does not factor in additional fees, so read the fine print before deciding whether a card is right for you.

How can you get a good APR?

Working toward (or keeping) healthy credit history is a good way to increase your chances of getting a favourable APR when you apply for a credit card. Better credit scores could help you qualify for a lower APR, which could save you money over the long term. If you know you will be applying for a credit card sometime soon, you may benefit by working to boost your overall credit health.

Need a lower interest rate on your credit card? Consider looking for a balance transfer card, which can help you obtain a lower interest rate on your credit card debt. That’s because balance transfer cards allow you to move credit card debt from one card to another, ideally at a better APR. Just watch out for any balance transfer fees associated with the transfer.

Bottom line

Knowing what’s behind an APR is important. It gives you a more complete picture of what you’ll be paying in interest, and it offers you another tool for effective comparison shopping.

As you’re comparing credit cards, pay special attention to the different APRs listed in the cards’ terms and conditions, and whether they’re variable or fixed.

And while APR is important, it’s not the whole picture. Make sure you’re comparing apples to apples, and looking at any fees associated with the card. Consider the total package before applying for a credit card.