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A credit card's interest rate is the price you pay for borrowing money. For credit cards, the interest rates are typically stated as a yearly rate, called the Annual Percentage Rate (APR). Where it can become a little more complicated, however, is that each single credit card may have multiple APRs that apply to it. The interest rate you are charged will depend on the rules and policies of your card company, which are the legal guidelines they must follow that are established by federal government regulators.
While APRs may sound confusing and complex on the surface, once you know how to find your card’s APR and you know which APR applies to you it is relatively simple. The problem for many cardholders, however, is that they don’t grasp the concept of APR and they don’t know what rate they are being charged or how that relates to their own consumer behavior.
Here’s a common example that puts that into perspective. A credit card company may entice you to open a new account with them by promising a very low interest rate. Later on, however, you notice that they have starting charging you two or three times as much interest – or even 10 times your original APR. Something terrible has happened, but why has it occurred and what in the world can you do about it?
Don’t panic because that’s the purpose of this explanation. We’ll cover the basic nuts and bolts of APR’s for you in easy-to-comprehend language. That way you’ll never have to deal with that kind of unexpected shock when you receive your monthly credit card billing statement.
Fixed vs Variable Rates
For starters, it’s important to know that there are two categories of APRs; they can be variable, which means they can change by going up or down over time, or they can be non-variable or fixed. A fixed or non-variable APR remains the same month after month. When it comes to credit cards you will usually have an APR that is relatively stable – as long as you don’t miss a payment or violate some other part of your cardholder agreement.
Credit card companies do, however, almost always reserve the right to change your rate – even if it’s a non-variable one – based on such things as changes in economic conditions that impact the financial markets. Granted, they have to notify you before they make a change like that – but it is still important to know that no credit card rate is set in stone forever.
How to Find a Credit Card’s APR
In order to figure out what your credit card’s APR is, consult your card member agreement where the terms and conditions are located. The APR will usually be found on a chart at the top of the page or beginning of the page. You’ll see the rate next to a description of what kind of transaction is subject to that particular APR. If you are online and thinking of applying for a credit card, you may have to look pretty hard to find a section, tab, or website link labeled, “terms and conditions,” “rates and disclosures,” or “pricing and information.” Go there and scroll until you find the box with a title like “Disclosures” or “Interest Rates and Fees,” and that’s where the various APRs for the card will be disclosed.
Completely Avoiding Interest Payments
Regardless of what the purchase APR on your credit card may be, it’s also possible for you to use the card as much as you like without ever having to pay any additional interest charges. The key is to pay off your balance in full before it comes due, or more specifically, to pay it off within your card company’s designated grace period for repayment. Credit expert Jason Steele outlines exactly how you can avoid paying interest.
Let’s take a look at a few different APR’s you may come across:
- Purchase APR-For most consumers the most important APR is the one charged for purchases. This is also the one that credit card companies usually refer to in their advertising – unless they offer such a high APR that they prefer to avoid discussing it in the marketing materials. The purchase APR is the interest rate that you will be charged for purchases made with the credit card that are not repaid in full before the end of the credit card’s grace period.
- Balance Transfer APR –Likewise, card companies will also designate an APR that will be levied on balance transfer transactions. It is quite common these days for banks to charge the same for both balance transfers and purchases, but always check the corresponding APR just to be sure. Also keep in mind that companies often charge an additional fee or surcharge whenever you complete a balance transfer, which can potentially add a 2-3% fee to your cost. Look for credit cards with no balance transfer fee to save on cost.
- Cash Advance APR -The rate charged for a cash advance is frequently several percentage points higher than the purchases and balance transfer APR, whether you do it with a convenience check, at an ATM, or by some other means. Before you take out a cash advance, be sure you know what the APR is so you can plan accordingly and we suggest you only take out a cash advance when absolutely necessary. The interest charged is often not worth it.
- Discounted APRs or “Teaser Rates” –To lure in new customers, credit card companies will oftentimes provide a very attractive, low interest rate of 0% – typically on purchases or balance transfers (or both). These typically come with an expiration date and after that intro rate expires, the APR will revert to the on-going or “standard” APR for that particular card. It is not unusual to see a zero “teaser” rate skyrocket to a rate of 15 -29%. Beware of those changes so you can take full advantage of the low rate, but pay off your balance before being the on-going APR kicks in.
- Penalty APR –Card companies also impose significantly higher interest rates if you fail to pay the minimum amount due on your credit card each month. Triggering that kind of penalty can be dramatically expensive. Even if you are coasting along and enjoying a special 0% introductory rate. For example, if you miss just one payment your card company will likely impose a huge penalty by charging you the penalty APR. These penalty rates can be staggering – running as high as 29% or more.
The good news is that thanks to the legislation known as the CARD Act (Credit Card Accountability, Responsibility, and Disclosure Act) of 2009, card companies have to restore your original rate if you make six consecutive on-time payments. If you miss a payment and suffer a penalty APR, for example, but make your next six payments on time, your bank has to revert back to the old non-penalty rate.
Check out our Infographic on Understanding Credit Card Interets Rates.