What is the Annual Percentage Rate?

Perhaps you’ve seen the term APR, or Annual Percentage Rate, used to refer to everything from mortgages and car loans to credit cards. In this article, we will look at the credit card APRs that you have likely seen on your monthly statements. Knowing what an APR means, how it is calculated, and how it is applied can help you make more informed credit card decisions.

Understand the APR

The APR is an annualized representation of your interest rate. When deciding between different credit cards, the APR can help you compare how expensive a transaction will be with each one. It is useful to consider two important things about the way the APR works: how it is applied and how it is calculated.

How the APR works

Generally, credit card companies offer you a grace period for new purchases. If you only make purchases and pay your balance in full at the end of each month on the due date, you pay only the amount you owe without interest. However, if you decide to have a balance on your card, you pay the agreed-upon interest on your outstanding balance.

How to calculate the APR

Many variable interest rates start by using an index, such as the US Prime Rate, and then add a margin. The result is the APR. Variable rates can change if the index changes, and some banks also offer a fixed APR.