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Credit cards and various types of loans come with an annual interest rate. This is also called credit card interest or interest rate.
For credit cards, APR is what you will have to pay if you don’t pay off your monthly balance in full. An APR credit card does not include fees or other charges.
On the other hand, the annual interest rate for mortgages, auto loans, student loans, personal loans, and other loan products usually includes fees and additional costs.
Annual interest rates on credit cards and other loan products vary from lender to lender and from borrower to borrower. The annual interest rates are also based on your credit score and other factors. The better your credit score, the more likely you are to receive a lower annual interest rate, which can result in lower loan payments.
What is APR?
APR stands for Annual Percentage Rate. This refers to the annual cost of borrowing money, whether it be with a credit card or a loan.
The interest rate is the principal amount, expressed as a percentage, that the lender charges you for taking out a loan. For example, a credit card might have 16% APR, while a mortgage might offer 3.4% APR.
How do APR credit cards work?
Luckily, the math involved in calculating APR isn’t as complicated as you might think.
First, let’s look at how a credit card issuer calculates APR. For credit card interest rates, the calculation starts with an index. A popular index to use is the US prime rate (or prime lending rate). This rate is about 3 percentage points higher than the federal funds rate set by the Federal Reserve, which determines US monetary policy. The federal funds rate is the interest rate that banks and credit unions charge each other for overnight loans.
The credit card issuer then adds a margin, which is a percentage added to the base rate or other type of index. The margin is usually tied to your credit score. A higher credit rating usually results in lower margins.
So let’s say the index – in this case the prime rate – is 3.25%. If the card issuer assigns you a margin of 15 percentage points, then the annual interest rate on the credit card will be 18.25%. If you have a variable rate card, changing the index can cause your credit card’s interest rate to go up or down.
Types of annual credit cards
Among all credit products, credit cards have the most varied interest rates. Loans usually come with only one type of APR (although a homebuyer can get a so-called adjustable-rate mortgage). With a credit card, you will find the following types of APR:
- Buy per annumA: Annual Purchase Value is the rate you pay when you make purchases with a credit card. Typically, this is the lowest annual interest rate on a credit card.
- Cash advance per annumA: If you take cash with a credit card, you will be charged at the cash advance rate. This is often higher than buying per annum.
- Penalties per annum: If you do not comply with the conditions, the card issuer will impose on you a penalty in the amount of per annum. For example, card issuers often charge an APR penalty when you make a payment after the due date. The APR penalty is generally higher than the APR of an APR purchase or cash advance.
- Introductory yearA: For a limited time, the card issuer may offer 0% initial APR to allow cardholders to make purchases or transfer balances without paying interest.
What is the difference between a fixed annual interest rate and a variable annual interest rate?
The index affects whether a credit card has a fixed or variable annual interest rate.
A fixed annual interest rate does not change when the index changes, unlike a variable annual interest rate. The cardholder agreement for your card explains how the annual interest rate can fluctuate based on index and federal interest rates.
What is a good APR for a credit card?
Good credit card APR below average APR. Keep in mind that only people with excellent credit history can qualify for below-average annual interest rates.
An above-average annual interest rate is not necessarily a bad thing. But the higher the annual interest rate, the more you will pay for purchases, cash withdrawals, and other credit card transactions – unless you pay off the balance in full each month, thus avoiding interest charges entirely.
bottom line
It’s important to know how credit card annual interest rates work, but it’s imperative that you pay off your balances every billing cycle to avoid credit card debt. This way you will never pay interest, which means you will not pay more than the price of what you bought.
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The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.
