What Is Credit Card APR?

Short answer: APR states a credit card interest rate on an annual basis. A card can apply different APRs to purchases, cash advances, credit card checks, or other balance categories.

APR is annualized, but interest may be calculated daily

APR states the rate on an annual basis, but many issuers calculate interest daily using an average daily balance. A daily periodic rate is generally calculated by dividing APR by 360 or 365, depending on the issuer.

A simplified monthly estimate can divide APR by 12, but an actual statement can differ because months and billing cycles have different lengths and balances change during the cycle.

One account can have several APRs

Card companies often charge one rate for purchases and different rates for cash advances, credit card checks, or other transaction categories. The statement must show categories with different APRs and the balance in each category.

Always identify the transaction category before using a rate in a calculation. Applying a purchase APR to a cash advance estimate can produce a misleading result.

Example

A $5,000 average balance at 24% APR produces a simplified monthly rate of 2%. Multiplying $5,000 by 2% gives a $100 estimate for one month.

That is an educational scale estimate. A daily-balance calculation can produce a different charge, especially when payments and purchases occur throughout the cycle.

Common mistakes

• Comparing APR without checking fees.
• Assuming one APR applies to every balance category.
• Ignoring which balance category a transaction enters.
• Treating APR as the only cost of carrying or transferring a balance.

Use the agreement for the actual method

The current cardholder agreement and statement identify applicable rates, balance categories, fees, and calculation details. Use those documents when verifying an actual charge.