What is APR and how does it work?

APR means annual percentage rate. It represents the price to borrow money. It’s expressed as a yearly percentage that includes the loan’s interest rate plus additional costs, such as lender fees, closing costs and insurance. 

Read on for a deeper dive into APR, including how it works, the different types of APR and more.

What you’ll learn:

• APR represents the price you pay for a loan. It typically includes interest rates and any fees, too.

• APR can sometimes be the same as a loan’s interest rate, like in the case of most credit cards.

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

• Fixed and variable APRs could still change based on other factors, but lenders typically have to notify borrowers upfront or before a change occurs.

• Credit card APRs may vary based on the type of transaction. Rates may also be situational, such as with penalty APRs or low-rate introductory APRs.

Understanding APR can be an important part of making more informed credit decisions. If you’re deciding between credit cards, APR is one factor to compare to help determine which credit card might be best for you.

It’s easy to lump interest rate and APR into the same category, but they’re actually two different types of rates. An interest rate is the percentage charged on the principal loan amount. So unlike APRs, interest rates don’t include any fees, closing costs or insurance. But if there are no such fees, the APR and interest rate may be the same.

Remember: APR represents the cost of borrowing money—including the yearly interest rate—as well as any fees. The amount you’ll owe will also depend on whether your card or loan has a fixed or variable APR.

In the case of credit cards, APR is usually the same as the interest rate—both of which are especially important if you carry a balance from month to month. If you pay off your balance on time every month, you won’t be charged any interest. But if you carry a balance from month to month, you’ll be charged—based on the APR—for the unpaid portion.

Your credit history, credit scores and credit activity can affect what APR you’re offered and whether you receive a fixed or variable rate.

Both fixed and variable APRs will determine the amount you pay for what you borrow. Take a closer look at how they work:

• Fixed APR: A fixed APR generally doesn’t change over the life of the loan. But as the Consumer Financial Protection Bureau (CFPB) notes, a fixed rate doesn’t mean “the interest rate will never change.” But 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.

Banks and credit card issuers use an APR formula to determine how much interest borrowers must pay on their outstanding balances. APR can be calculated daily or monthly, depending on the loan or card. 

And credit card issuers are required to disclose how they calculate APR. In general, their calculations rely on:

• The loan balance

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

• The interest rate of the loan

• Any fees related to the loan

APR calculations can vary based on the type of loan you’re seeking. For example, an APR for a mortgage could include the interest rate, mortgage points, origination fees and more. In the case of an auto loan, the APR may be determined based on your credit history, loan amount, down payment and the age of the car.

Understanding the different types of APRs can help borrowers choose the credit card that’s best for them and their spending habits. Keep in mind, the APR can sometimes depend on the type of transaction, like a cash advance versus a purchase. 

The APR can also vary 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 home loan. And how the credit card is used can affect the rate too.

Here are a few types of APRs:

A credit card’s purchase APR is exactly what it sounds like: It’s 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. 

And keep in mind that 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 or exchanging dollars for foreign currency. 

Cash advances usually don’t have a grace period. This means that interest will likely start accruing immediately.

If a borrower violates the terms of their card’s contract by doing things like missing a payment or being late with a payment, the APR on their card may increase for a period of time. 

Be sure to check your card’s terms and any notices the issuer sends related to your account.

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. While this promotional period may last anywhere from six to 21 months, the balance transfer APR may only apply to the balance transferred. 

But keep in mind that a separate APR can apply for new purchases, even while a balance transfer APR is in effect. So make sure you review all the interest rates—in case 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 2024—the Federal Reserve’s most recent available data—the national average APR was 21.59%.

Comparing a credit card’s APR to the national average could be part of determining what credit card could be right for you. But keep in mind that credit card APRs typically vary based on the borrower’s credit score and other financial information. So ultimately, what you consider a good APR will depend on your financial situation and unique circumstances.

There’s no single answer on how to get a low-APR credit card. But maintaining good credit scores can help lenders see you as a better candidate for cards with low APRs and additional benefits. The CFPB has a few tips that can help you get and keep good credit scores, too: 

1. Use your current card responsibly and pay your bills on time. Late payments can have a negative effect on your credit. Consider automating payments or setting reminders to help you remember. 

2. Avoid getting too close to your credit limit. Scoring models factor in how close to maxing out you are, known as your credit utilization ratio. Credit utilization is a measure based on all your available credit. And experts say not to use more than 30% of your available credit across all revolving accounts. So if you have a single credit card with a $5,000 credit limit, that means not going above $1,500.

3. Keep building your credit. Credit scores are based on your experience with credit over time. 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 suggest to lenders that your financial situation has changed negatively—even if that’s not the case.

5. Monitor your credit. Everyone is entitled to free credit reports from each of the major credit reporting agencies through AnnualCreditReport.com. CreditWise from Capital One is another tool that can help you monitor and track your credit. Using it won’t affect your credit, and it’s free for everyone.

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

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, depending on the type of loan. 

Knowing a bit more about how APR works can help you make an informed choice about loans and credit cards. If you’re interested in a low rate credit card, consider checking out 0% introductory APR credit cards from Capital One. View important rates and disclosures.

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