What is a credit card APR?
An APR helps you to work out what borrowing on a credit card will cost over a year. Find out everything you need to know about APRs and how to choose the right card for you.
What is annual percentage rate or APR?
The annual percentage rate (APR) is the official rate for helping you understand the cost of borrowing across a year when you use your credit card.
It’s different to your balance, which is the whole amount you owe on the card when the payment is due.
The APR takes into account the interest rate and other fees and is what you’ll have to pay on top of your balance if you don’t pay all (or at least some) of it off by the due date - this is shown as a percentage of the amount you’re borrowing.
- The lower the APR, the cheaper it’ll be to use your card to pay for goods and services
- A representative APR can help you compare cards but you may not be offered the same rate when you apply
- How much a credit card will cost you depends on your APR, how you use the credit card and how much you repay each month
- Cards with 0% interest periods still have APRs that will apply after a certain amount of time
How does the interest rate work on a credit card?
The interest rate is applied to the credit card’s daily balance and builds up until the payment due date - typically, if you pay off your balance each month you won’t be charged interest.
But if you don’t repay the balance in full, the interest on any purchases you’ve made using the card will usually be backdated to the date you bought them.
In other words, any portion of the card you don’t pay off each month will be charged interest.
This interest will be added to your balance - so if you don’t repay the full balance the next month you’ll end up paying interest on the interest, – this is called compound interest.
You can make payments more manageable by spreading them out over a longer period of time so you repay less each month, but it’ll cost you more in interest in the long-run.
What is compound interest?
For most credit cards, the interest on your balance is applied daily. But, if you pay off your balance in full by your payment due date, this interest will be wiped clean.
If you don’t pay the balance off each month, interest is applied to the amount remaining.
During the following month, interest will be added to the previous month’s interest and to your balance - this is called compound interest.
It means compound interest can quickly have a big impact on the amount you owe if you don’t keep on top of your payments or opt for a card with an interest-free period.
Are there different types of interest rates when you’re using a credit card?
Yes, you’ll be charged different interest rates depending on the type of transaction you’re using the card for, these include:
Purchase rate - This is the rate you’re charged when you use your credit card to buy goods or services and is what your APR is based on. However, you usually won’t be charged this interest if you pay off your balance in full each month.
Cash advance rate - If you use your credit card to withdraw money - or for things like paying a utility bill or getting cashback - you’ll be charged a higher rate of interest. This is charged immediately even if you repay the balance in full and there may also be a transaction fee.
Balance transfer rate - Some providers will let you transfer your balance to another credit card. To do this you might be offered an introductory interest rate - sometimes 0% - for a set period of time or you may be charged a standard balance transfer rate.
Money transfer rate - You can move money from your credit card into your UK bank or building society account. It can then be used to help you pay for goods, services, utility bills and so on. If you do this you’ll be charged interest and a transfer fee might also apply.
What’s the difference between the interest rate and APR?
Although ‘APR’ and ‘interest rate’ are often used to mean the same thing, they are different from each other.
The simple interest rate (the interest that’s not compounded) is calculated using factors like the Bank of England base rate, your credit rating and the cost of administering the card.
The APR includes the interest rate as well as any other charges or fees you might need to pay, for example an annual card fee.
This means the card's APR will be higher than its interest rate, so it provides a clearer picture of how much it’ll cost you to borrow money using the credit card.
Be aware that your credit card provider can increase and reduce your interest rate while you have the card, but they must give you at least 30 days’ notice before they do this.
What does APR include?
The APR helps you understand the cost of borrowing on the credit card across a year. It includes any standard fees, like an annual fee, and the interest you’ll need to pay.
The APR is useful for helping you choose a credit card and comparing it against others, but you’ll also need to compare the fees that different cards may charge.
What’s not included?
The APR only takes compulsory charges into account. It won’t include any avoidable fees like charges for making late payments or going over your credit limit.
What is the APR calculation based on?
When you apply for a credit card, the card provider will take into account the following to calculate your APR:
- The Bank of England interest rate
- Any compulsory fees, like an annual management fee
- Your credit rating
- Your financial history and how well you manage your money
- The amount you want to borrow, which is called your credit limit
The APR is calculated on an annual basis but is typically added to your balance each month.
Most credit cards’ APRs are variable, which means the interest rate on your card could go up or down. This will depend on the Bank of England Base rate and how you use the card. For example, if you don’t make your monthly payments on time, your APR could go up.
Representative vs personal APR
When you’re considering taking out a credit card it’s worth understanding the difference between a representative and a personal APR:
What’s a representative APR?
- A representative APR is the advertised APR you’re most likely to get if your application is successful
- To help you compare cards, all providers will calculate the representative APR using the same standard formula and an assumed credit limit of £1,200
- It’s an example rate because lenders can’t specify your actual rate until they’ve seen your application and assessed factors like your credit rating
- Providers only have to offer the representative APR to 51% of customers that apply, so the final rate you’re offered could be much higher depending on your situation
What’s a personal APR?
- The APR you’ll be offered when you apply for a credit card will depend on your individual financial circumstances
- It’ll be based on factors like your credit rating, how you manage your money and whether you’ve repaid any previous money you’ve borrowed
- Your personal APR could be the same as the representative APR, or it could be higher depending on your application assessment and the credit limit you’re applying for
Different types of APRs
The representative APR is based on the amount of interest you’ll pay on purchases, but there are other types of APR that can also apply to your credit card:
- Introductory APR - this is typically a lower than usual APR, sometimes even 0%, that’s given to new customers for a set number of months. Some credit cards offer introductory APRs on purchases, balance transfers or both
- Balance transfer APR - this is the interest rate you’ll pay when you transfer a balance from one credit card to another. People often transfer their balance to another card when the introductory APR is about to end
- Penalty APR - this is a high interest rate that can be applied if your credit card payment’s late or if you regularly spend over your credit limit. It can apply to both new and existing transactions on your card and can last for six months before it’s reviewed
How can I lower my credit card APR?
There are a few ways that you can bring down the interest rate on your credit balance, which include:
Opening a credit card with an introductory 0% deal
Whether you’re successful will depend on your credit history. Make sure you check if there’ll be a transfer fee and you should try your best to pay off the balance before the standard APR kicks in.
Speaking to your card provider
It’s worth contacting your credit card provider to try and negotiate a lower rate. If you take time to compare other cards you can reference the competitive rates being offered.
Paying more than the minimum payments
If you pay just the minimum amount required it’ll take longer to clear your debt. It could also impact your credit rating over time. This could lead to higher APRs, so always try to pay off as much as you can.
Building your credit score
If you repay your debts on time and don’t exceed your credit limit on your cards you’ll be offered a lower APR than someone who regularly misses payments. A good credit score can help you get a better rate.
Choosing a credit card with the right APR for you
Which credit card’s right for you will depend on your circumstances and how you want to use the card. For example:
Balance transfer cards
If you want a better interest rate and help with your monthly repayments, you can try a balance transfer card. You may need to have a good credit rating and you’ll need to pay attention to when the low interest rate period ends to avoid getting caught out.
Credit builder cards
These cards could help you build your credit history. They typically have a low credit limit and high interest rates, but paying your bill on time can improve your credit rating and help you get better APR offers in the future.
If you’re planning a big purchase like a car or a holiday, these cards usually have an interest-free period which can make it a cheaper way to borrow money. Again, you’ll usually need a good credit rating to get one.
Some cards will offer cashback, travel miles or store discounts when you use them. They often come with an annual fee and high interest rates, so you’ll need to make sure the benefits outweigh the costs.
When you’re looking for a credit card you’ll need to compare APRs, rewards and fees before you make a decision. And always be confident you can afford the minimum payment.