What Is APR (Annual Percentage Rate)?

Understanding annual percentage rate


APR represents the price you pay to borrow money—including fees—expressed as a percentage, according to the Consumer Financial Protection Bureau (CFPB).

In this post, you’ll learn more about APR, including why APR is important, how APR works, the difference between APR and interest rates, and the different types of APR.

Why Is APR Important?

If you’ve ever applied for a car loan, a mortgage or a credit card, you’ve probably seen the term annual percentage rate (APR). 

Understanding APR can help you make more informed credit decisions. It gives you a good idea of how much you’ll pay to borrow money. And if you’re deciding between credit cards, APR is one factor you can compare to help determine which credit card is best for you.

How Does APR Work?

APR will be a factor in how much you pay to borrow money each month. In the case of credit cards, it’s especially important if you carry a balance from month to month. Many credit card companies offer a grace period for new purchases. If you pay off your balance on time every month, you won’t be charged any interest. If, however, you carry a balance from month to month, you’ll be charged, based on the APR, for the unpaid portion.

What’s the Difference Between APR and Interest Rate?

It’s easy to lump interest rate and APR into the same category, but they’re actually two different types of rates.

Your interest rate is the percentage charged on the principal loan amount. In the case of a credit card, that loan amount would be your card balance.

Compared with interest rate, “APR is a broader measure of the cost of borrowing money,” according to the CFPB. It includes the interest rate plus other costs, such as lender fees, closing costs and insurance. If there are no lender fees, the APR and interest rate may be the same—and that’s typically the case for credit cards.

How Is Your APR Calculated?

Banks use an APR calculation formula to determine how much interest you pay on your outstanding balance. It can be calculated daily or monthly, depending on the card.

Remember that some accounts have multiple APRs. Card issuers are required to disclose how they calculate APRs. Check the disclosures and terms of a card before you apply.

The costs that go into an APR calculation can vary, based on the type of loan you’re seeking. 

For example, an APR for a mortgage could include the interest rate, points, origination fees and more. In the case of an auto loan, the APR is determined based on a number of factors. Those can include credit history, loan amount, down payment and the age of the car.

What Are the Different Types of APRs?

There are different types of APRs, but typically you’ll have either a fixed APR or a variable APR.

Understanding the different types of APRs—and knowing when rates might change—can help you choose the card that’s best for you and your spending habits. Keep in mind, the APR can sometimes depend on the type of transaction.  

The APR can also be different depending on the type of credit you’re applying for. A credit card’s APR is usually higher than that of a car loan or a home loan. And how you use your credit card can affect your rate. Here are a few types of APRs to be aware of:

Fixed-rate APR

A fixed APR generally doesn’t change over the life of your loan. This may make budgeting easier, because the rate’s more predictable.

Variable APR

Variable APR is tied to an index interest rate, such as the prime rate. If the prime rate increases, so does your variable APR. So while the loan may have a low APR at first, the APR can increase over time. This can make it more difficult for you to plan your monthly budget.

Cash Advance APR

The cost of borrowing cash from your credit card tends to be higher. There may be different APRs for checks or for cash advances. And these transactions usually don’t have a grace period.

Penalty APR

If you violate the terms of your card’s contract—by doing things like missing a payment or being late with a payment—the APR on your card may increase.

Introductory APR

A new credit card may come with a lower, limited-time APR. It can apply to purchases or specific transactions like a balance transfer

What’s the Difference Between Fixed APR and Variable APR?

One big difference between fixed APR and variable APR is whether the rate changes over time. While a fixed APR generally doesn’t change over the life of your loan, a variable APR is tied to an index interest rate that can change.

Where Can You Find Your Account’s APR?

Your credit card APR can be found on your monthly credit card statement. In many cases, you can find your current APR—and determine whether it’s based on the prime rate—by looking at the section about interest charge calculation.

Tips for Obtaining a Lower-APR Card

How do you get a low APR credit card? There’s no single answer. But maintaining a good credit score can make you a better candidate for cards with low APRs and additional benefits

There’s no magic formula for building credit, but these principles from the CFPB may help:

  1. Use your current card responsibly and pay bills on time. Late payments can have a negative effect on your credit. Consider automatic payments, or set reminders on your phone so you don’t forget. 
  2. Avoid exceeding your credit limit. Scoring models take into account how close to “maxing out” you are. Experts say not to use more than 30 percent of your available credit. If you have a $5,000 credit limit, that means $1,500.
  3. Keep building. Credit scores are based on your experience with credit. That means the longer your credit report shows you paying your loans on time, the better.
  4. Apply for only the credit you need. Be careful about applying for a lot of credit over a short period of time. It could indicate to lenders that your financial situation has changed negatively—even if that’s not the case.
  5. Monitor your credit. Everyone is entitled to one free credit report from each of the major credit reporting agencies every 12 months. If you spot an error, contact the agency and the company that provided the information to try to fix the problem. CreditWise® from Capital One® is a free tool that can help you monitor and track your credit.

What Factors Can Have an Impact on APR?

Such things as your credit history, credit score and credit activity can affect what APR you’re offered—and whether it changes. It’s important to understand the terms and conditions associated with your credit card. Be mindful about your rate, because it will increase after your introductory period expires. There are other factors that could affect your rate too.

In general, increases to your rate will apply only to future purchases, not your existing balance. But the APR on your existing balance could increase if you’re more than 60 days late in paying your bill.

Ways to Make Informed Decisions About APR

APR is just one factor to consider when choosing your next credit card. But knowing what it is and understanding how it impacts your payments can help you make an informed decision.

Remember, financial situations vary from person to person, so it’s tough to say what a bad APR for a credit card is. But you can use APRs to compare cards. 

If you’re thinking about applying for a new credit card, keep these things in mind:

  • APR and interest rate are two different things.
  • Fixed APRs generally do not change over the life of your loan.
  • Variable APRs can fluctuate based on external factors like a change in the prime rate.
  • How you plan to use your card can affect rates—there may be additional APRs based on the transaction.

The availability of the CreditWise tool depends on our ability to obtain your credit history from TransUnion.

We hope you found this helpful. Our content is not intended to provide legal, investment or financial advice or to indicate the Capital One product or service is available or right for you. For specific advice about your unique circumstances, consider talking with a qualified professional.

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