How Does APR Work on Credit Cards?


When it comes to shopping for or comparing credit cards, or even understanding a card you already have, the terminology can be tricky. However, it is important to understand the terms and disclosures that come with your card to ensure you are getting the best deal. One of the biggest factors to consider when choosing a credit card is the APR. A common question is, how does APR work on credit cards? There are many facets to answering this. In this blog, we will learn all about APR – for credit cards, that is!



how does apr work on credit cards

What is APR?

To begin to understand how APR works, you must first understand what APR is. APR, or annual percentage rate, is simply your interest rate stated as a yearly rate. The interest rate is the price you pay for borrowing money.

On some loan types, such as mortgage loans, there is a difference in the interest rate and APR. The difference is due to other costs associated with the loan which get factored into the APR.

Fees are not included in the APR on credit cards because not all fees apply to each person. Fees will depend on your personal use of the card.

How Does Credit Card Interest Work?

To fully understand APR, you must first understand credit card interest. Credit card interest is different from many other loans in the aspect that interest is only charged if you don't pay off your full balance every month. Essentially, you could enjoy the benefits of having a credit card without paying interest!

The period of time until you are required to pay interest on your purchases is referred to as a grace period. The grace period is the gap between your credit card's billing cycle and when the payment is due. A typical grace period is between 20 and 30 days.

How Does an APR Grace Period Work?

Let's say you made purchases with your credit card in March. Your credit union performs its billing cycle on the last day of the month, the 31st. They also offer a 25-day grace period upon which no interest will be charged for purchases. Therefore, you have until April 25th to pay off the balance for any purchases in March without paying interest.

How is My APR Determined?

Several areas can affect how your APR is determined. These include:
• Your credit score.
• Whether your APR is a fixed rate or variable rate.
• The Federal Reserve Bank Prime Rate.
• Credit card rewards.

How Your Credit Score Affects Your APR

Many credit unions and other financial institutions offer a range of APRs, and individuals qualify for a certain rate based on their credit score. If you have good credit, you will receive a lower APR. If you have bad credit, you will receive a higher APR. This is referred to as risk-based pricing. The impact your credit score can have on your interest rate is significant. Below is a list of the average interest rate based on credit:

WalletHub Average Interest Rate by Credit:
• Excellent Credit: 14.08%
• Good Credit: 20.68%
• Fair Credit: 23.43% Average Interest Rate for Bad Credit:
• Bad Credit: 25.30%

To highlight the difference your credit score can make, consider the following hypothetical situation. If you have an APR of 14.08%, and a credit card with an average daily balance of $1,500.00, your monthly interest would be $17.80. Changing the interest rate to 25.30% would result in a monthly interest amount of $31.05. If your credit card balance is higher, these rate differences would be more substantial. In a later section, you will get more information on how this interest is calculated.

Fixed-Rate APR vs. Variable-Rate APR

Credit card issuers decide whether to offer fixed rate APRs, variable rate APRs, or both.

Credit cards that offer a fixed rate have an APR that will not change over the life of the loan. You will always have the same APR that you qualified for at the beginning of the loan. An exception to this would be if you met the circumstances to receive a penalty APR.

A variable-rate APR changes throughout your loan term. The Federal Reserve Bank sets a prime rate for the U.S. Frequently, variable rates will be tied to this prime rate, and then a margin is set. For example, the current U.S. Prime Rate is 4.75%. The rate for a credit card may be determined to be the U.S Prime Rate plus 10%. Therefore, the rate for that credit card would be 14.75%.

There are benefits and downfalls to both types of rates. If interest rates rise, a fixed-rate card will keep the same APR, while a variable rate will increase. On the other hand, if interest rates fall, you will still have the same high-interest rate for a fixed-rate card, while your variable card rate card will fall. You must decide which option is preferable for you.

At 121FCU, we offer several different card options to meet the various needs of our members! Check them out and apply online below!

VISA Signature
VISA Platinum Rewards
VISA Platinum Secured
Business Credit Card

How do Credit Card Rewards Affect APR?

Credit card rewards programs are very popular. The premise of these programs is that you earn reward points when you make purchases with your card. You can then redeem these points for various rewards, including gift cards, merchandise, airline miles, and even cash back!

While beneficial to consumers, these programs can be quite costly. To balance this, it is becoming increasingly common for financial institutions to offer two separate options. Option one would be a credit card offering a rewards program. This option might have a slightly higher APR. The second option is a card without the rewards program and a slightly lower APR. These options benefit all credit card users, both rewards lovers and those who are not interested in these programs. Remember, even if you have a higher APR, you will not pay interest as long as you pay your balance off before the end of the grace period.

How Does APR Work & How is My Interest Calculated?

At this point, you already know that APR is a yearly interest rate. Interest is compounded daily and charged monthly. With all of these different timeframes and terms, there is no doubt that trying to calculate your interest could quickly get confusing.

There are several different methods for calculating APR and interest. According to the Consumer Financial Protection Bureau, most financial institutions use the average daily balance method. This is the method used here at 121FCU. To better understand this method, the steps are broken down below.

To walk through the calculations, we will use a hypothetical APR of 17.3%, and an average daily balance of $700.00.

1. Divide your APR, after converting the percentage to a decimal, by the number of days in the year to get your daily periodic rate.
0.173 / 365 = 0.00047  This new number is the daily periodic rate
2. Multiply the daily periodic rate by your average daily balance. You may have to calculate your average daily balance if you don't already have this figure.
0.00047 x $700.00 = $0.33
3. Multiply this number by the number of days in your billing cycle.
$0.33 x 30 = $9.87 interest charged for this billing cycle

Please keep in mind, when calculating interest yourself, your answer could vary slightly from that of your financial institution due to differences in rounding. Also, some institutions use 365 for the number of days in a year, while others use 360.

Other methods, used less frequently are:
• Previous balance method.
• Adjusted balance method.

This handy guide breaks down how to calculate interest on all of these methods:


Is My APR the Same on All of My Card Transactions?

There are multiple types of transactions that can be performed on a card. Each category typically is assigned an APR, and these APRs are often different.

Purchase APR

This category applies to your everyday card purchases. This the rate that will most frequently apply, and that you will immediately see on card advertisements. It is typically the lowest APR, aside from an introductory rate.

Balance Transfer APR

If you have a balance on one card account and would like to move that balance to another account, this is called a balance transfer. A specific APR will apply to this balance transfer that is likely higher than your purchase APR. It is common for financial institutions to run promotions on balance transfers to entice members or customers to transfer the balance to the account at their institution.

Cash Advance APR

Many credit card accounts will allow you to withdraw funds from your line of credit, whether at an ATM just like a debit card, or transferred directly to your checking account. This is called a cash advance. Just like balance transfers above, this type of transaction will typically have its own higher APR.

Introductory APR

Financial institutions might offer an introductory APR. Under the terms of an introductory APR, you will receive a lower interest rate for some time after you have opened your account. It is common to see a six-month period with a 0% APR. Be aware that if you carry a balance at the end of the six months, you will begin paying interest on any remaining balance and new purchases.

Take note that the grace period for purchases may not apply to the balance transfer and cash advance categories.

Can I Lower My APR on My Existing Cards?

Call your credit card issuer to discuss this. If you have had your card for a long period of time, have made your payments on time, and have a good credit score, your lender may be willing to negotiate a lower rate. If they are unable or unwilling to do this, and you meet all of the previously listed criteria, or your circumstances have improved since the opening of your current card, it may be time to shop for a new card with better terms.

What Should I Know About APR?

To recap the information listed above, here are important things to know about APR:

• According to, the average credit card interest rate is currently 17.31%. Check this rate when you are looking for a new card to make sure you are getting a good deal.
• You can have several different APRs on one credit card.
• APR can be fixed or variable. Make sure you understand which one you are looking at.
• Credit card companies are required to provide you with a disclosure that lists your APRs for each category and other terms.
• Credit score, card rewards programs, prime rate, and whether your APR is fixed or variable all affect your APR. Consider your spending patterns and credit information when deciding which programs will be most beneficial to you.

Important APR Tips to Save You Money

Following these important APR tips will save you money:
• Pay your balance off before your grace period is over to avoid paying interest.
• Don't pay your credit card late or your APR will rise, costing you more hard-earned money.
• Not all APRs are the same – different transaction categories have different APRs.
• Keep your credit score up to be eligible for a better APR.
• The earlier in a billing cycle you make your card payment, the less interest you will pay.
• APR is not the only factor that matters when choosing a credit card. A card could have a slightly lower APR, yet have other high fees that will cost you more in the long run.

Hopefully the question "How does APR work on credit cards" has now been answered. Remember to review the APR and all other terms listed on a credit card disclosure when comparing options. Consumer protection regulations have made it easy to shop and compare! Check out the excellent credit card options offered at 121FCU today!


Back to Blog

Related Articles

10 Types of Credit Cards: A Beginner’s Guide

In today’s modern world, a credit card is one of the most convenient and effective financial...

How Do Secured Credit Cards Work?

How do you get good credit if you have no credit or build better credit if you have poor credit? ...

Personal Loan vs Credit Card: How to Know Which is Better for You

Personal Loans Vs. Credit Cards - Which Do I Choose? When the time comes that you decide to get a...