APR – What Does it Mean?

What is APR Featured Image

APR, or annual percentage rate, is used in reference to everything from mortgages and auto loans to credit cards. In this piece, we look at credit card APRs—which you’ve probably seen listed on your monthly statements. Knowing what an APR is, how it’s calculated and how it’s applied can help you make more informed credit card decisions.

# The Importance of Knowing it

APR is an annualized representation of your interest rate. When deciding between credit cards, APR can help you compare how expensive a transaction will be on each one. It’s helpful to consider two main things about how APR works: how it’s applied and how it’s calculated.

# How does APR Works?

Generally, credit card companies offer a grace period for new purchases. If you only make purchases and pay off your ending balance each month by the due date, you pay just the amount you owe with no interest. However, if you opt to carry a balance on your card, you pay the agreed-upon interest on your outstanding balance.

# How to Calculate APR

Many variable interest rates start by using an index, such as the U.S. Prime Rate, and then add a margin. The result is the APR. Variable rates can change if the index changes, and some banks offer a non-variable APR as well. Here’s an example of how the rate is set:

# Calculate How Much You Owe

Banks use a formula to determine how much interest you pay on your outstanding balance. They calculate it using a daily or monthly periodic rate, depending on the card.

Keep in mind some accounts have multiple APRs, so this calculation may be applied for each one. The statement gives you more information about how to calculate the balance subject to interest rate.

# Types of APR

Purchase APRCash advance APRCash advance APRCash advance APR
Purchase APRCash Advance APRPenalty APRIntroductory APR
The rate applied to credit card purchases.The cost of borrowing cash from your credit card tends to be higher. There may be a different APR for checks or certain types of cash advances.

No grace periods.

Usually the highest APR. It may also be applied to certain balances when you violate the card terms and conditions like failing to make payments on time.(or promotional APR) Features a lower APR for a limited time period. It can apply to specific transactions as well as balance transfers, cash advances or any combination.


# Summary

  • The APR can help you evaluate all offers and promotions.
  • Generally, lenders cannot change the APR for the first 12 months. However, an APR can change in that period if it’s a promotional or variable rate or if the terms and conditions are violated.
  • Consumers should review terms and conditions, including the APR, before using their cards.
  • In most circumstances, when changing terms and conditions, companies must give 45 days advance notice.

Source: https://bettermoneyhabits.bankofamerica.com/en/credit/what-is-apr

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