News & Tips
How Does APR on a Credit Card Work?
When you’re looking for a credit card, the rate is usually one of the top factors in your decision-making process. You’ll usually see the APR (annual percentage rate) next to the percentage.
You’re likely not the only one wondering: How does APR on a credit card work, exactly? How does credit card interest work? Why don’t credit card issuers just list the interest rates instead of the APRs?
We’ll help answer those questions with useful definitions, insights, and more to help you make the right decision for your needs. We’ll also share the benefits of having a credit card at Space Coast Credit Union (SCCU)!
Credit Card Interest: How Does it Work?
To wrap your head around how an APR works on a credit card, let’s first talk about what goes into calculating the interest on a credit card account. When you get a credit card, it comes with a certain rate that you see as a percentage.
So, that’s the rate. What would you actually need to pay in interest?
Most credit cards charge interest only on outstanding balances rather than on every transaction you make during the month. Let’s say you charge a total of $1,000 during your first month with the card. When your monthly statement arrives, you’ll see that total balance owed of $1,000 and a minimum payment due—let’s say it’s $25.00.
To stay in good standing with your credit card issuer and protect your credit score, it’s important to make at least that minimum payment of $25.00 by the due date. Of course, you can always pay more—any amount from that minimum up to the full $1,000.
If you don’t pay the full amount by the due date, interest will be charged on the remaining balance. So, if you decide to pay $400 of your $1,000 balance, interest will accrue on the outstanding $600.00. And remember, interest can compound—possibly daily—so you’ll end up paying interest on your interest as well as on that principal balance.
Pro Tip: Check All the Rates
When you’re asking yourself, “How does credit card interest work?” don’t forget to check if your credit card issuer applies the same interest rate for balance transfers and cash advances as they do for purchases. Some issuers charge a higher rate for cash advances and balance transfers, so it’s good to be aware.
Definition of an Annual Percentage Rate (APR)
An APR, like an interest rate, appears as a percentage, and it refers to the actual cost of borrowing funds per year for an account. In other words, it’s what it costs you to borrow money—typically through the interest and fees paid on a loan.
The word “loan” may sound strange in connection to a credit card, but when you buy something using a credit card, the issuer is extending you credit—which, at a high level, is the same thing that happens when you take out a loan (such as a personal loan). The difference:
- Personal loans: A form of an installment loan where the borrower receives a lump sum payment and pays it back in predefined installments.
- Credit cards: Offer a revolving line of credit, allowing you to borrow up to your credit limit, repay it, and access credit again.
How Does Annual Percentage Rate Work on a Credit Card?
The interest rate and the APR are usually different figures with the APR being higher for installment loans because it factors in the interest and the fees you pay to get and maintain the loan. With a credit card, though, the interest rate and the APR are the same.
So why don’t financial institutions just list interest rates in their terms and conditions rather than APRs? It’s because of the Truth in Lending Act, which requires financial institutions to provide APRs, allowing you to comparison shop. So, the credit card issuers typically just list the APR rather than saying something like this: Interest Rate: 14.49%; APR: 14.49%.
The APR is usually either fixed or variable, and credit cards may have different APRs for purchases, balance transfers, cash advances, or introductory/promotional periods.
- Fixed APR: This means the APR won’t change based on the U.S. Prime Rate (but could change due to other factors).
- Variable APR: This means the APR could increase or decrease, depending on a benchmark, such as the U.S. Prime Rate. For example, the prime rate plus 3%.
Does the APR include other credit card fees?
The APR on credit cards includes interest charges and sometimes certain fees, but not all possible charges. Here's a breakdown of what's typically included and excluded:
Included in APR:
- Interest Charges:
- Purchase APR - interest on unpaid purchases.
- Balance Transfer APR - interest on transferred balances.
- Cash Advance APR - interest on cash withdrawals.
- Penalty APR - a higher interest rate applied if you miss payments.
- Some Finance Charges
- These are part of how the APR is calculated when you carry a balance from month to month.
Not included in APR:
- Annual fees
- Late payment fees
- Over-the-limit fees
- Balance transfer fees (even though the APR for balance transfers applies, the one-time fee isn't part of the APR calculation)
- Cash advance fees
- Foreign transaction fees
- Returned payment fees
While the APR helps you compare credit card interest rates, it doesn't reflect total cost if you regularly incur fees or carry a balance. Be sure to always check the terms and fee disclosures in addition to the APR.
What determines someone’s APR?
When asking yourself “How does the APR work on credit cards?” you may wonder why lenders charge different APRs for different customers—it’s because credit card issuers base rates on the customer’s creditworthiness.
How do I calculate how much I pay on my balance?
The good news is if you don’t maintain a balance on your credit card (paying the amount off in full each month), then you won’t accrue interest.
If you’re carrying a balance, you’ll need to know your credit card’s APR, the daily periodic rate (how much credit card interest you’re charged per day on your balance), and the days in the billing cycle to calculate how much you’ll have to pay on a balance.
The formula will vary by creditor, but here’s how it generally works. Let’s say you owe $600 on a credit card with an 18% APR for a card with 25 days in the billing cycle. Here’s how to determine how much you’ll pay on a balance:
1. Divide APR by 365 (days in a year) and multiply by 100:
(0.18/365) X 100 = 0.0493% is the daily periodic rate
2. Multiply the balance by the daily periodic rate by days in the billing cycle. Then, divide that amount by 100:
($600 X 0.0493% X 25)/100 = $7.40 owed in interest
Keep in mind your interest can also compound daily (paying interest on your interest and the principal balance).
Low APR Credit Cards
Plenty of credit card types exist, and it’s important to choose one with the structure and benefits that will suit your financial style and practices. SCCU offers the following credit cards with low variable rates, no annual fee, no cash advance fee, and no balance transfer fee, with the same APR for purchases, cash advances, and balance transfers:
- Visa® Low Rate: This card has the lowest rate as SCCU, and it’s great for those who may carry a revolving balance from month to month.
- Visa Signature®: If you’re looking for a credit card that rewards you with points on every purchase, this is a top contender.
- Visa® Platinum: This is a cash back credit card with favorable rates, too.
The above cards also offer special introductory rates for the first 6 months, an ideal time to make a purchase if you’d planned to make a large one (or even if you’d like to save money on everyday purchases). If you pay off those charges by the end of your introductory period, you’ve basically gotten an interest-free loan during that time frame. Then, with your low APR credit card, you’ll save money on interest going forward.
If you’re looking to build your credit, consider a Visa® Secured credit card. We also offer Visa® Student credit cards to help teens (ages 15-17) build credit.
Choosing SCCU for Low APR Credit Cards
Credit unions are not-for-profit institutions that promote the financial wellness of their members without a need to provide earnings to stockholders. This means that SCCU can offer competitive rates on credit cards and other loan products with low (or no!) fees, along with free education to help our members manage their money to achieve their financial dreams.
As part of our commitment to financial wellness, we provide answers to commonly asked questions like “How does annual percentage rate work on a credit card?”
With our low APR credit cards, you’ll benefit from:
- Visa Zero Liability protection: This helps ensure that you won’t be held responsible for unauthorized charges made on your credit card.
- 2Way Text Fraud Alerts: These give you a heads up if a potentially fraudulent activity occurs with your credit card account.
- Manage Cards: This is available in Online and Mobile Banking and allows you to set location restrictions, spending limits, monitor your transactions, and more.
- FICO® Score: You can see your credit score in Online & Mobile Banking.
- Visa account updater: With this, your credit card information will automatically update with participating merchants.
Subject to approval, these are just some of the many benefits you’ll receive when you choose SCCU’s low APR credit card. See all credit cards at SCCU.
More About SCCU
SCCU is the third-largest credit union in Florida with over 60 branches and 24/7 Online and Mobile Banking. Our promise: Honest People. Trusted Products. Time Valued. We’re a full-service financial institution that offers checking and savings accounts, auto loans, personal loans, home loans, and more. With just a $5 deposit into a Share Savings account, SCCU membership is open to relatives of current members and anyone who lives or works in any of our service counties. If you have any questions, feel free to get in touch with us!
