Your interest rate on a credit card or loan is the rate you pay for borrowing money. Credit card interest rates are usually expressed as an APR, or annual percentage rate. Credit card APR is the yearly interest rate you pay on credit card debt.
Let’s look at how APR works and different types of APR.
How does APR work?
When you make a purchase on your credit card, you’re borrowing money from the bank to make that purchase. The interest rate is the cost of borrowing money from the bank. You typically have a grace period on credit card purchases and won’t be charged interest on those purchases if you pay your balance in full by the due date each month. However, if you carry a balance on a credit card past the due date, you can lose the grace period and be charged interest on the unpaid balance and new purchases that start once each purchase is made.
Your APR represents the percentage rate you’re charged annually for a specific type of transaction. Your credit card will have an APR for purchases. Other transactions you may make with the card may have a different APR. A cash advance, for example, often has a higher APR than the purchase APR.
For most credit cards, the APR isn’t the same for everyone. Your specific APR is typically determined within a set range for a credit card, based on your creditworthiness.
Types of credit card APR
Different balances can have different APRs. Here are some of the most common:
Purchase APR
The purchase APR is the rate that applied to purchases made with a credit card.
Cash advance APR
When you use your credit card to withdraw money from an ATM or other source, you are taking out a cash advance on your credit card. The amount you withdraw will be charged the cash advance APR, which is typically higher than the purchase APR.
While other types of APR, such as purchase APR, can come with a grace period when you’re not charged interest, you typically start accumulating interest immediately on a cash advance.
Penalty APR
Penalty APR is the rate applied if a payment is late or returned. A penalty APR is typically higher than the APR that would otherwise apply on your credit card.
Balance transfer APR
It’s possible to transfer a balance from one card to another. Some credit cards will have different APRs on balance transfers – for example, an existing credit card might offer a low promotional APR on balance transfers for a set period.
Introductory APR
An introductory APR is used when a new credit card offers a low APR for a set period. The introductory period starts when you open the credit card and lasts for a specified amount of time. Credit cards can have low introductory APR offers on purchases, balance transfers or both.
Once the low introductory period expires, the card's regular APR will be applied against any outstanding balance.
Variable APR vs fixed APR
Variable APR
Credit cards typically have a variable APR. A variable APR means that the APR can change with an index rate. This is usually the prime rate, which is determined by individual banks and typically based in part on the federal funds rate set by the Federal Open Market Committee of the Federal Reserve.
Fixed APR
A fixed APR remains the same. However, the card issuer can change a fixed APR under certain circumstances, such as if you miss a payment. The card issuer generally must notify you of a change in the fixed interest rate in advance of the change.
How to avoid paying interest on a credit card
Interest charges can add up over time. To avoid interest charges, pay your credit card’s entire statement balance each month on or before the due date.
If the option is available, you can use your online credit card account to set up automatic payments. You can choose to automatically pay the minimum payment due, the statement balance or a custom amount on or before the due date.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
