In this brief blog, we are going to define what a credit card APR is and why you should understand it.

What is a credit card APR?

A credit card APR is short for Annual Percentage Rate. A credit card APRis the rate of interest which you are charged over a 12 month period. For instance, a card with 24% APR costs 2% per month on balances that you carry from month to month. 

On most cards, you can avoid paying interest on purchases if you pay your balance in full each month by the due date.  The credit card APR you are charged will depend on how you use your credit card.

When you apply for a credit card you will usually be informed of the credit card APR prior to applying.

The credit card APR is charged on balances which you carry on from each statement period or from one month to another.

A credit card can have numerous APRs for different things. They can have:

A purchase APR

A balance transfer APR

Cash advance APR etc

Some of these rates may also be changed by the credit card provider and you will be informed prior to them changing.

If you are still confused on what a credit card APR is then Barclaycard Summarises it here for us again.

“Put simply, credit card APR is the total cost of borrowing over a year, including interest and standard fees. But by understanding a bit more about APRs, you can find they’re a quick way to compare credit cards, as well as figure out the total cost of using one.” – Barclaycard

You will usually see an assumed credit limit of £1200 used to enable you to compare all the different APRs on offer from the credit card providers.

How is the Credit Card APR Calculated?

The credit card APR  is calculated on the credit card balance each month but as some months vary in length, most credit card issuers use a daily periodic rate (DPR), which is the APR divided by 365.

The daily rate is multiplied by your daily account balance and by the number of days in the month. Here’s the basic formula:

Balance x DPR x days in monthly billing cycle = interest for that month’s credit card statement

Introductory credit card APRs

Some credit card providers may offer you with an introductory credit card APR. These are designed to lure you in but more often after the introductory phase has ended the credit car will move on to a very expensive credit cards APR.

You may also lose access to your introductory credit card APR if you fail to make your monthly credit card repayments. 

You may never have to pay credit card APR charges if you never carry a credit card balance from one month to the other or if you avoid doing things which may have credit card APR charges such as withdrawing cash at the ATM.

How does representative APR work for credit cards?

When searching for a credit card you may often see the term representative apr listed. This is also the case for most credit products.

Representative APR is the advertised rate which 51% of successful applicants would get upon a successful application. 

You can safely assume that 49% of applicants may, therefore, get a higher rate than the representative APR.  

The APR most applicants will get will depend heavily on their ability to manage their credit. If you have a good credit score then you are more likely to get the credit card providers representative APR.

Credit cards can also use their purchase rate when advertising and because this rate won’t take into account other things you may be able to do with the credit card such as a balance transfer. You may find that this rate may not fully reflect the rate you have to pay on average to use the card.

The representative APR rate will always include all compulsory charges you have to pay to the credit card provider. This could be fees such as an annual credit card fee.

The representative APR will not include fees or charges you may incur that are not part of the normal usage of the credit card e.g late repayment charges or going over your credit limit charges.

What else should you know about credit card APRs?

Credit card APRs and the advertised rate don’t always reflect what you pay back as credit cards work on what is known as compound interest. 

This means interest is charged on the outstanding balance and any interest charges that were added to the account as “owing”. This means you are being charged interest on past interest charges and the previous balance. 

With compounding, the credit card debt you owe grows much faster and you end up being charged a much higher rate in interest in principle.

In this brief guide we discussed Credit card APR, if you have any questions or comments please let us know.

John Bate

John has 22 years of experience in financial services. This spans across financial research, financial services (As a qualified mortgage broker and underwriter), financial trading and sales at global investment banks. While working as a publishing research analyst, he covered European bank credit and advised institutional clients on investment strategies at both JP Morgan and Societe Generale. John has passed all three levels of the CFA (Chartered Financial Analyst) programme.