Understanding Credit Card Interest: APR Explained
Credit card interest can quickly turn a small purchase into a big expense. Understanding how APR works helps you make smarter decisions and avoid costly debt.
What is APR?
APR stands for Annual Percentage Rate—the yearly cost of borrowing money on your credit card. If your card has a 20% APR, you would pay roughly 20% of your balance in interest over a year if you never paid it off.
How Interest is Calculated
Credit cards calculate interest daily using your daily periodic rate (APR divided by 365). This compounds, meaning you pay interest on interest.
Example: A $1,000 balance at 20% APR, paying only the minimum, could take 9 years to pay off and cost you over $900 in interest.
Types of APR
- Purchase APR: Rate for regular purchases (typically 15-25%)
- Cash Advance APR: Rate for cash withdrawals (often 25-30%)
- Balance Transfer APR: Rate for transferred balances (often promotional 0%)
- Penalty APR: Higher rate triggered by late payments (up to 29.99%)
How to Avoid Paying Interest
The simplest way: pay your full statement balance by the due date every month. Credit cards offer a grace period (usually 21-25 days) where no interest accrues if you pay in full.
If you carry a balance, you lose the grace period on new purchases—interest starts accruing immediately.
Tips for Managing Credit Card Interest
- Always pay more than the minimum
- Request a lower APR from your issuer
- Consider a balance transfer to a 0% APR card
- Pay highest-interest cards first
- Set up autopay to avoid late fees and penalty APR