What is APR on a Credit Card and How Does it Work?

When choosing a loan, the potential borrower primarily focuses on the size of the annual percentage rate (APR) set by the lender. But the overall cost of the loan is defined not only on this indicator. Financial institutions frequently offer a minimum annual rate on a loan to attract more customers to their services.

At the same time, the borrower has to make additional payments – various commissions, insurance, etc. Take it into account when choosing the most suitable loan program for you. Make research on every topic that you are interested in, even how to refinance a car loan.

Banking establishments are not about charity. The main purpose of their work is to make a profit. They need to cover the salaries of the personnel, rent, loan costs, stationery, operating costs, interest on deposits, etc. As you can understand, these aspects influence the cost of a loan.

What is APR?

The annual percentage is the amount of money in the form of a percentage from your loan. It is paid by the borrower to the lender for using the lender’s money. The annual rate is calculated based on a certain period – one year. The funds that are given as a loan are called loan capital. Its productive use leads to surplus-value, which is the source of interest.

In the vast majority of countries, APR is regulated by the state in one form or another. For example, the central bank sets the official discount rate, “freezes” interest or the possibility of lending in general, and sets taxes on your income.

For the client, this measurement defines the amount of money he or she has to overpay for the issued loan. In terms of the general economy, the annual rate affects the rates of loans of commercial financial institutions, the inflation level, and business activity in general.

How Does APR Work?

APR is used to determine the value of the deposit and the loan. When opening a deposit, the client gives his or her money to the banking establishment for their saving. A bank uses the received money for its own purposes (in most cases for giving loans), and the depositor receives a certain percentage with a flow of time.

If you applied to the bank for borrowing money, then you have to pay an interest to your lender. The difference between interest on loans and contributions is called the margin. It is the main source of income for a financial institution. The banking business mainly works due to this principle.

In such a way, APR can be defined as a particular percentage of the deposit amount or a loan paid by the bank or borrower for using the funds within one year. A person can usually withdraw money from a deposit without paying interest during grace periods. ( a period between the end of a billing cycle and the day your payment is due) This period is set by the lenders.

How Is APR Calculated?

Before you apply to the bank for a loan, you need to calculate the APR you will be required to pay off. In other words, you should understand how much it will take you. This understanding will help you find the most beneficial conditions and get prepared for future expenditures. After all, the overpayment can be so large that it would be much better to wait and accumulate the required amount on your own.

To define the annual percentage you need to go through these steps:

  • Determine the interest rate:
  • Add to this sum the expenditures on administrative issues;
  • Divide it by the overall loan amount;
  • Then multiply this amount by 365 days (one year);
  • After it you need to multiply it by 100 to transfer the sum into a percentage;

In such a way, an APR formula looks like this: Interest rate + administrative fees/ borrowing amount x 365 x 100.

With the help of this transparent formula, you will be able to feel more confident while looking for the best loan conditions.

Types of APRs

Let’s face the truth. People usually don’t expect the banking system to be easy. There are several types of annual percentage rates. You should have a basic understanding of them so that you can find the most beneficial option for you when you need it.

Why does it happen so? There are a lot of aspects that influence your APR. It usually differs depending on the loan or transaction type you are applying for. We will talk about these and other factors later. Now let’s get a closer look into the APR’s types.


This APR type is quite easy to understand. Its name speaks for itself. It is a kind of interest a person has to pay when making purchases with credit cards. It is one of the most common types the borrowers face.

What’s more, the desire to buy something expensive usually becomes the main reason for taking a loan from the bank. The main thing here is to make sure you take into account the purchase APR.

You will be expected to pay off more than you have taken. If you are prone to buying things on a whim, you should better set a 0 credit line. It will help you avoid unexpected financial problems.

Cash Advance

Advance payment is a process of depositing funds, making a payment to pay for goods, works, and services before they are received. Payment and calculation of the advance payment can be carried out by taking into account the actual profit received on a quarterly and monthly basis, as well as quarterly payments based on the results of the reporting period.

This type of loan allows quick and flexible borrowing from a lender. However, if you opt for it, be ready to face a higher interest rate compared with other loans.

You should also understand that there are some purchases that are considered as cash advance ones despite the fact that you don’t have access to money. Among them may be buying casino chips, lottery tickets, and the like. What’s more, these transactions usually don’t have a grace period.


This APR type may be viewed as the most unpleasant one. A person is usually charged a penalty for not fulfilling his or her obligations. Among possible violations are missing the payment deadlines or skipping the loan repayment at all.

All in all, any violations of terms and conditions will lead to monetary sanctions. The penalty is usually around 30%.

There is no legal regulation for the maximum rate the lenders can charge. The best thing you can do is to be an obedient borrower. It will help you pay off your loan much easier. The more penalties you have the longer you will cover them.

Introductory or Promotional

Promotional APR works as an advertisement for the newcomers. These rates are usually offered for the short term.

Promotional APR presents beneficial conditions and terms for the clients. They may be set for a range of services including even cash advance apps.

Why do lenders do it? The banking sector is highly competitive. To attract new clients money lenders have to be creative!

What Impacts Your APR?

The annual percentage rate is closely connected with a range of economic aspects. To get a better understanding of it let’s look closer at each separate factor.

Type of Credit Product

Consumer, mortgage, installment plan, car purchase – for each case, certain percentages are calculated that are beneficial to the lender. For different purposes, you will need different loans. The APR of each credit type varies.

Credit Score

Everyone has a credit score. You may be surprised by this information but this score defines whether the lenders can trust you. If they don’t, they usually set a higher APR.

Payment History

The same thing is with the payment history. When lenders approve a loan for you they take a risk. They can’t know for sure whether you will pay the whole sum in time. The more doubts they have about your solvency, the higher annual percentage rate they will set for you.

Loan Term

Now almost all loan types allow you to repay the loan ahead of schedule without penalties. Previously the bank counted on certain interest for a certain time, and therefore early repayment was not welcomed.


We should remember that some types of borrowings are regulated by states and municipal governments. For example, the mortgage conditions differ from one part of the US to another.

Useful Tips for Getting a Card with a Lower APR

To get a lower APR you should take some preparatory measures. Before applying for a loan make sure you don’t have unpaid debts. Your credit score and history matter. If it isn’t alright, take a period of six months to increase your credit score.

Secondly, don’t be lazy. There are many financial lenders, and each of them offers different lending terms and conditions. Spend some time searching and investigating these offers.

Explain to your lenders how you are going to repay the loan. If you have short-term problems, let them know about it and say how you are going to solve them. Specify your sources of income and the available savings.

What’s more, do your best to make a good impression on the managers. In some cases, it can also influence your APR terms. Among other things, don’t be shy to refuse the lenders and go away. It is okay to set your priorities first.

APR vs. Interest Rate

When applying for a loan, make sure you understand the difference between APR and interest rate. The last notion is narrower. APR includes fees such as discount points, mortgage insurance, and a range of closing costs. In such a way, this notion gives a deeper understanding of the amount of money you have to pay off.

According to the Federal Truth in Lending Act, the lenders are obliged to tell the borrowers the interest rate and APR they will have to repay. Due to this, pay attention to both these aspects while applying for a loan.


Annual Percentage Yield or APY— is an income rate that is calculated by taking into account compound interest. Both APR and APY notions determine the interest measurements. However, the first one defines the amount of money charged and is frequently associated with a credit card.

At the same time, APY is about the money a person receives. To put it simple, it is better to have a low APR and a high APY. APY’s main purpose is to show the real revenue from investment within one year. It takes into account all the compounding activities from the respective assets that may have occurred during that year.

How to Avoid Interest Charges

If you don’t want to pay interest charges, make maximum use of the grace period. As we have mentioned above, it is a clearly defined time during which a person has to pay off their obligations before being charged with the interest. According to current legislation, lenders have to set no less than 21 days of a grace period.

In such a way, the best thing a cardholder can do is to repay the closing balance before the due date. Try to pay off the loan obligations in full on a regular basis. Another important recommendation for you is to check your credit card activity. It will help you avoid exceeding the budget.

Where Can You Find Your Account’s APR?

You can look for this information on the latest credit account statement, and the terms and conditions of your cooperation with a lender. You can also apply directly to the issuer of a credit card or visit its website.

Credit Card Statement

Your APR must be almost at the end of a credit statement. Find the section “Interest Charge Calculation” or the like.

The Credit Card’s Terms and Conditions

Unfortunately, people rarely read this document. However, the client’s APR is specified at the top of it.

The Issuer’s Website

Log in and find in your personal profile the information about your APR. This information updates regularly so you will find your actual percentage rate.


All in all, it is essential to know what APR means, what aspects have an impact on this notion, and how to calculate it. Thanks to this article now you understand the basic APR principles and can make well-informed decisions as to the best beneficial terms and conditions of cooperation with the lenders. Among other things, this knowledge can help you avoid interest charges and even lower your annual percentage rate. For those people who feel anxiety about using credit cards, it is especially important. The more you know, the more you get.


Is it better to have a lower interest rate or APR?

It is better to have a lower APR because this notion is wider. Apart from the interest rate, it includes a range of fees involved in calculating the amount a person owes. Among them are the closing costs, discount points, broker fees, etc.

Can a credit card have 0% APR?

The credit card holder is offered an interest-free loan for several months. After this period the interest rates return to the normal rate for a current moment. Banks usually hope that the cardholder will be late or will exceed a credit line resulting in penalties.

What is the effective annual percentage rate?

The effective annual interest rate is the rate that shows the actual return on investment, taking into account all factors affecting income: the time of investment, the frequency of depositing/withdrawing funds, the regularity/irregularity of these operations, etc.

What is a good APR for a car loan?

Your APR is defined by your credit score. The higher, the better. If it is between 781 and 850 you can get an interest rate of 2.4%, if it is between 661 and 780 - 3.56%, and if it is from 601 to 660 - 6.70%. It is the best APR you can have in 2022.

What is the limit of variation for an annual percentage rate?

As we have mentioned, the annual percentage rate varies from one lender to another. That is why the competition in the banking sector is harsh. However, your APR can’t vary more than 1/8 of the 1 percentage point from the current annual percentage rate.