Annual Percentage Rate (APR) explained

From fixed to variable and purchase to penalty, here's what APRs mean.

You’ve probably heard the term “APR” before – but what does it mean? More importantly, why does it matter and how does it factor into your credit card payments?

To get a quick overview of what an APR is, you can play the following captioned video.


Defining APR

Let’s start by defining an annual percentage rate (APR). As the Consumer Financial Protection Bureau explains, APR is the price a consumer pays for borrowing money. Specifically, APR is a yearly rate a consumer pays for carrying a balance.

How is this different from an interest rate? When it comes to credit cards, there is no difference – they are the same.

When you take out a mortgage, there are other upfront charges and fees which are added to the APR (for example, you could have a mortgage with 5% interest, but an APR of 5.25%). With credit cards, however, the APR is just interest – things like annual fees, late fees, cash advance charges and so on are impossible to predict, so they are not included in the APR calculations.

The APR is generally easy to find. It must be clearly displayed before a customer signs an agreement. Thanks to digital banking, the information is usually just a click away, and APR and interest charge calculations are a click away on your online billing statements.

Common types of APRs

 Consumers encounter many types of APRs. The more common include:

  • Fixed APR: The interest rate is locked in this case, which is common with installment loans but not credit cards.
  • Variable APR: These vary with market interest rates and are common with credit cards.
  • Introductory APR: This rate is usually given when you open a new account and is lower than the regular APR on the account for a specific period of time.
  • Purchase APR: This is the rate for when you make purchases with your card and is usually lower than a cash advance APR.
  • Penalty APR: This rate can be brought about by not paying on time.
  • Balance transfer APR: This type of APR, usually the same as the purchase APR, is what a consumer pays when transferring a balance from one credit card to another.
  • Cash advance APR: This is applied when you take cash directly from the card (versus using the card to make a purchase).

Regardless of the type of APR, there are a few things to keep in mind. The first is that rates can vary widely — not only among lenders but also due to factors such as credit scores.

Better scores can mean lower rates and other financial advantages. It is also important for consumers to understand and compare rates because, at a baseline, they are the cost of borrowing money.

Now that you know the basics of APRs, read around a little. Check out some terms and conditions, and make sure you understand the implications before you jump into a new loan or credit card agreement.

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