What is APR & how does it work?

The annual percentage rate (APR) represents the price of borrowing money. It’s expressed as a yearly percentage that includes the interest rate plus additional costs such as fees, closing costs and insurance.

Understanding how APR works can help you make more-informed credit decisions. For example, if you’re deciding between credit cards, you can compare APRs to help determine which issuer and card might work best for you.

What you’ll learn:

• The APR represents the price of a loan. It typically includes interest rates and any fees.

• The APR can sometimes be the same as the interest rate. That’s the case with most credit cards.

• The APR may be fixed or variable, meaning the rate may stay the same or it might change with market factors.

• Credit card APRs may vary based on the type of transaction and how the card is used.

APR stands for annual percentage rate. It represents the yearly total cost of borrowing money, combining interest charges, fees and any other additional costs into a single percentage.

APR works by calculating the interest rate on the money you borrowed as well as any additional costs, including things like: 

• Origination fees
• Transaction fees
• Broker fees
• Closing costs

The terms APR and interest rate are sometimes used interchangeably, but they often differ. If no additional fees exist, the APR and interest rate may be the same. That’s usually the case with credit cards. But it may not always be the case for car loans, mortgages and other loans, which might include things like closing costs or insurance.

The type of APR determines the amount you pay for what you borrow. Here’s how fixed and variable APRs work:

• Fixed APR: A fixed APR generally doesn’t change over the life of the loan. That doesn’t mean the interest rate will never change. But according to the Consumer Financial Protection Bureau (CFPB), the issuer generally must notify you before the change occurs.

• Variable APR: A variable APR is tied to an index interest rate, such as the prime rate. If the prime rate increases, so does the variable APR. So while the loan may have a lower APR at first, the rate can increase over time. Most credit card accounts have a variable APR.

APY stands for annual percentage yield. APY is different from APR because it’s a rate of return on savings. It’s sometimes also known as EAR, or effective annual rate. And it typically applies to money you place in a deposit account, not to money you borrow.

Banks and credit card issuers may use this APR formula to determine how much interest borrowers must pay on outstanding balances:

The APR can be calculated daily or monthly, depending on the loan or card. Credit card issuers are required to disclose how they calculate APR. In general, their calculations rely on:

• The loan amount

• How many days there are in the loan term for the year

• The interest rate of the loan

• Any fees related to the loan

With an installment loan, the APR is either fixed or variable. But with a credit card, there are a few more APR types, depending on how you use the card.

A credit card’s purchase APR is the rate that’s applied to purchases made with the card.

The cash advance APR is the cost of borrowing cash from a credit card. This rate tends to be higher than the purchase APR. Cash advances usually don’t have a grace period. This means that interest accrues immediately.

There are other transactions that might be considered cash advances, even if cash never touches your hands. These include buying casino chips, purchasing lottery tickets and exchanging dollars for foreign currency.

A penalty APR is a higher interest rate that issuers might apply when a cardholder violates the terms of their card agreement. It may be temporary. Late and missed payments are two examples of violations that could result in a penalty APR.

There are two common types of promotional APRs:

• Introductory APR: A new credit card may come with a lower limited-time APR. Different card issuers have different standards for what qualifies as an introductory APR, so it’s important to read the terms and conditions. For example, you may only get the introductory APR for purchases above a set amount.

• Balance transfer APR: A balance transfer may qualify a borrower for a special APR on a new or existing credit card. The promotional period may last anywhere from 6 to 21 months, but the balance transfer APR may only apply to the balance transferred. 

A separate APR can still apply for new purchases. So make sure you review all the interest rates—if there are multiple—and any fees, like a balance transfer fee or foreign transaction fees.

The Federal Reserve regularly reports the national average APR. As of February 2026, the Fed reported that the national average APR on credit cards that were assessed interest was 21.52%.

There are several factors that can affect the APR you get, like credit history and credit scores as well as:

• Loan type: APRs are often lower for secured loans backed by collateral. Examples include mortgages and car loans.

• Lender rates: Lenders decide what APRs to charge based in part on how much they pay to borrow money. This benchmark is usually based on the prime rate.

• Creditworthiness: Lenders also use creditworthiness to determine a borrower’s APR. This is based on factors like payment history, credit utilization and credit mix.

Maintaining good credit scores can help lenders see you as a better candidate for cards with low APRs and additional benefits. Here are a few tips that can help you get and keep good credit scores: 

1. Use your current card responsibly and pay your bills on time. Late payments can have a negative effect on your credit scores. Automating payments or setting reminders could help you remember your monthly payments. 

2. Avoid getting too close to your credit limit. Using a lot of your credit could be a red flag to lenders. The CFPB recommends keeping your credit utilization rate at 30% or lower.

3. Keep building your credit. Credit scores are based on experience with credit over time. That means the longer your credit reports show a history of on-time payments, the better.

4. Apply for only the credit you need. Applying for a lot of credit over a short period could suggest to lenders that your financial situation has changed negatively.

5. Monitor your credit. Everyone has access to free credit reports from each of the major credit bureaus through AnnualCreditReport.com. CreditWise from Capital One is another tool that can help you monitor your credit scores. It’s free, and using it won’t affect your scores.

Still have questions about APR? These answers to frequently asked questions might help.

The APR is the cost of borrowing money expressed as a yearly percentage. This figure is calculated based on the loan’s interest rate and any fees that are part of its terms. The APR may be fixed or variable. 

If you’re interested in a low-APR credit card, you could consider checking out credit cards from Capital One.

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