Learning how to use a credit card wisely is key to managing your finances properly and staying out of debt. One of the most important credit card terms you should study up on is APR, or annual percentage rate, which refers to the amount you will be charged each month expressed as a percentage if you carry a balance.
When it comes to credit cards, your interest rate and APR are the same. The good news is that you won’t get charged interest if you pay off your statement balance in full by the due date. If you don’t, interest can pile up quickly.
That’s because any portion of your balance that goes unpaid will carry over to the next billing cycle, which becomes your revolving balance, and this is what starts accruing interest.
APRs Represent How Much Interest You’ll Pay
While credit card APR plays a critical role in a person’s debt management, few people pay attention to what they’re paying each month.
In fact, a 2018 CreditCards.com survey found that only 39% of cardholders who regularly carried a balance knew their APR. That means over half of cardholders surveyed didn’t know their card’s APR and had no idea how much they were paying each month on their debt.
APR is not the same for every cardholder. Most credit card companies have a range and assign your interest rate based on your creditworthiness. To get the lowest possible APR, you have to have excellent credit. Anything below that means you will pay more if you carry a balance.
To find your credit card’s APR, review the Schumer Box found on your credit card agreement or statement. This is a table graph that breaks down important details about your credit card account, including the APR, interest rate, and fees.
You can also find these details in your online credit card account. The Schumer Box will show you different APRs for purchases, cash advances, balance transfers, and the penalty APR for late or missed payments.
Types of APRs
Here’s a quick look at the different credit card APRs you can expect to find on your account and what they mean.
1. Purchase APR
The primary APR on your credit card is the amount you will pay for new purchases after the grace period. This means you will only be on the hook to pay interest charges for those purchases if they aren’t paid off in full by the statement due date for which they appear.
2. Introductory APR
Credit card companies often offer an introductory APR during which new cardholders can enjoy zero or low interest for a set period. Just make sure to pay off the balance in full before the introductory period is up, as some cards may charge you interest on the entire initial balance, even if you only have a few dollars left to pay.
3. Balance Transfer APR
The balance transfer APR is the interest rate you’ll pay if you transfer a balance from one credit card to another. Balance transfers can help you pay down expensive credit card debt if you receive a no-interest promotion, i.e., a 0% balance transfer APR. These no-interest promotional periods usually run for about 12 to 18 months, depending on the card.
4. Cash Advance APR
Some credit cards allow you to withdraw cash from your available credit limit (up to a certain amount), but this will cost you. The APR for a cash advance is usually much higher than the APR for purchases, and you will likely have to pay a transaction fee, too. The cash advance APR begins on the date the cash is withdrawn. And unlike with purchases, these transactions are not eligible for the same interest-free grace period.
5. Penalty APR
If you miss a payment or make several late payments, your credit card company reserves the right to increase your APR to a higher rate, known as the penalty APR. This higher interest rate is negotiable after you make several consecutive, on-time payments.
6. Fixed vs. Variable APRs
Your credit card APR can fall under two types of interest rates — fixed or variable — so it’s important to know which type you have. Fixed APRs do not fluctuate, meaning your APR is locked and won’t change. A variable APR is tied to an index, like the prime rate, and will go up and down depending on what’s happening in the market.
With current interest rates rising, variable-rate credit cards are experiencing big shifts in their APRs, which makes any outstanding balance more expensive to pay down.
How to Avoid Interest
Using a credit card doesn’t mean you’re destined to pay interest every month. In fact, avoiding interest is possible as long as you follow these strategies:
- Pay off your statement balance in full every month. You won’t be charged interest as long as you pay your bill in full and on time. Setting up auto-pay for the full statement balance amount ensures you never miss a payment or pay interest.
- Get a credit card with a 0% promotional APR. You may qualify for a credit card with a 0% promotional interest rate on new purchases if you have good credit, generally considered a FICO Score above 670. These deals help consumers finance big-ticket items interest-free for several months, after which the regular purchase APR applies.
- Don’t spend beyond your means. Treat your credit card like a debit card and only charge purchases you can afford to pay off right away. Paying off a purchase immediately can help you keep your credit card balances from growing out of control.
How to Get a Lower Interest Rate
The following methods can help you achieve a lower interest rate on your credit card:
- Pay down your balance. Don’t get discouraged if you can’t pay off the entire credit card balance by the due date. Pay as much as possible to lower the balance and to avoid paying more in interest. If possible, try to pay twice during the month to lower the average daily balance, so you pay less overall.
- Transfer your balance. Move your current credit card debt to a new card offering a 0% balance transfer promotion. This will give you anywhere from 12 to 21 months to pay down the balance without incurring any interest fees. The bank will charge a small balance transfer fee, usually 3% to 5% of the amount transferred.
- Improve your credit score. Taking steps to improve your credit score will help you qualify for credit cards that charge lower interest rates and offer more robust reward programs. You can achieve this by paying down debt, lowering your credit utilization ratio (your card balances compared with your available credit limit), disputing credit report mistakes, and paying all your bills on time.
- Apply for a debt consolidation loan. Debt consolidation loans are installment loans in which you make fixed payments for a set period. They offer lower fixed interest rates, so you don’t have to worry about rising interest rates that can make your debt more expensive to pay down.
- Negotiate your interest rate. As long as you have good credit and a consistent history of paying your bill on time, you can effectively negotiate a lower interest rate on your current credit card. Though there are no guarantees, it doesn’t hurt to ask, so call your credit card issuer and give it a try.
Responsible Behavior Means Lower APRs and Fees
Understanding your credit card APR is important when managing your finances and avoiding or reducing your debt. If you aren’t happy with your current interest rate, remember that there are several ways to lower it. Responsible financial behavior will lead to good credit, and good credit leads to greater access to loan products with lower interest rates.