If you’re still learning about credit cards, you may have encountered the term APR and wondered what it stands for. More specifically, you’re probably wondering how APR works and whether you need to worry about it.
APR stands for annual percentage rate, and while it may sound complicated, it’s actually quite simple. Here’s what you need to know.
What is APR?
APR represents the annual cost you pay to borrow money from a lender or credit card issuer — in other words, your interest rate on credit card payments.
When dealing with credit cards, there is more than one type of APR: Purchase APR (the interest rate applied to purchases made with your card), introductory APR (a promotional interest rate offered for a limited time on a new card), cash advance APR (the interest rate applied to cash that you borrow from your credit card) and more.
However, when people talk about credit card APR, they’re usually referring to purchase APR.
APR isn’t the only cost associated with credit cards, as there are also things like annual fees and balance transfer fees to consider. However, it’s definitely the most significant cost unless you always pay off your balance in a timely fashion.
Does APR matter if you pay on time?
The short answer to this is no. Credit cards offer a grace period that allows you to make purchases with your card without incurring interest charges at the purchase APR rate, providing you pay off your balance in full by the payment due date each month. In this case, the purchase APR becomes irrelevant since there is no outstanding balance for interest to be accrued against.
Note that a grace period is not legally required, so it’s essential to understand the terms of your credit card agreement to know how borrowing money affects you.
How APR works
If you don’t pay your balance in full each month, your credit card issuer will charge interest on the remaining balance. Additionally, any new purchases you make may accrue interest from the day of the transaction without a grace period.
Because credit card company policies vary, make sure you read the terms and conditions for your specific credit card to understand how the grace period is treated.
The amount of interest credit card issuers charge is determined by your average daily balance. This means that every day you carry a balance will increase the amount of interest you have to pay. That interest can compound quickly, making it more challenging to eliminate your debt.
All of this is why our No. 1 commandment of credit card rewards is “Thou shalt pay thy balance in full.” You won’t get any value from your credit card rewards if you have to pay back interest every month.
Bottom line
Credit card interest can be a scary concept. It’s one of the reasons some people shy away from credit cards completely, seeing them as predatory and potentially money-draining.
The truth is that if you’re a responsible cardholder, you can avoid paying interest; your credit card can add value to your bottom line, not subtract from it. Paying off your balance in full each month will ensure you never have to worry about APR, allowing you to enjoy all the benefits that a rewards credit card can offer.