What is Annual Percentage Rate (APR)?

Getting a loan or opening a credit account is a big decision. And with so many banking terms to know, the process gets confusing fast. Luckily, once you know what the jargon means, you can make informed decisions and feel confident about your finances.

If you're contemplating a new credit card offer, considering a balance transfer, or simply managing your debt, knowing how interest works can help you make better decisions. And that includes the annual percentage rate (APR). This rate is more than a number on your statement — it represents the actual cost of borrowing money and determines how much you pay back in interest charges.

So, how does APR work? And what’s a good APR? Here’s everything you need to know.

What’s an APR?

APR is the price you pay each year to borrow money, expressed as a percentage. It includes interest, fees, and additional costs. This rate differs from a loan or line of credit’s simple interest rate because it encompasses all charges, offering a more comprehensive view of your borrowing costs.

Comparing APR when choosing between different loans or credit accounts helps you pay less over time. It's important to note that APR differs from annual percentage yield (APY), which is the amount of interest you earn on investments or from savings accounts. APY is about how much you earn, not how much you pay.

How to calculate APR

You don’t have to calculate APR on your own. Most loan and credit issuers have calculators that do the work for you. But if you’re interested in crunching the numbers on your own, here’s how.

Start by figuring out your periodic interest rate. This is the overall rate the issuer charges you on the loan. You should know the interest rate and fees along with how much you’re taking out and for how long. Here’s how to find the periodic interest rate:

[(Interest expense + total fees) / loan principal] / number of days in loan term = periodic interest rate

Now you can calculate the APR:

APR = (periodic interest rate x 365 days) x 100

You multiply the interest rate by 365 days because you’re calculating the annual rate. And you multiply everything by 100 for an actual percentage instead of a decimal.

6 types of APRs, explained

APRs come in many forms, depending on the situation. Credit card issuers, for instance, may present various APRs like purchase APR, cash advance APR, and balance transfer APR — each tailored for specific transaction types. Here are the most common types of you might encounter:

1. Purchase APR. The purchase APR applies to purchases you make with a credit card.

2. Introductory APR. This is a promotional rate you can get when you sign up for a new credit card. It’s usually lower for a temporary period, so pay attention to potential changes before you agree to receive it.

3. Balance transfer APR. The balance transfer rate applies when you move the balance from one credit card to another account. It’s equal to or higher than the purchase APR.

4. Cash advance APR. Cash advance APRs are for when you use your credit card to borrow cash. It’s typically higher than other APRs, which is why you should always pay back advances as soon as possible.

5. Variable APR. A variable APR fluctuates with changes in the market. Credit card issuers often use the prime rate, an average rate that the Federal Reserve sets, plus a set percentage to determine the variable APR.

6. Penalty APR. Some banks give you a higher APR if you miss payments. Learn what conditions trigger this APR and how it could impact your credit card balance.

What impacts your APR?

Lenders might offer you a different APR depending on your credit score or the type of product you’re looking for. Here are the factors that determine interest rates:

1. Credit score. A higher credit score typically results in a lower APR because it proves to the lender you’re a reliable borrower. Learning when credit scores update can help you time your applications.

2. Type of credit product. Some credit products, like purchase APR, cash advance APR, or balance transfer APR, come with different rates. If you plan on using some more than others, make sure those APRs aren’t too high.

3. Prime rate. The prime rate affects most APRs, particularly when those APRs are variable. Changes in the prime rate can boost or lower the interest you pay.

4. Lender's terms. Each credit card issuer may have its own criteria for determining APR, including your creditworthiness, the type of credit card, and market conditions.

Where can you find your credit card's APR?

You can usually find your APR in your credit card agreement, which is the document outlining the terms you agreed to when opening the account. It's also a feature on your monthly billing statements, often under sections like “Finance Charge” or “Interest Rate and Interest Charges.” The statement should tell you how the bank calculated those charges.

5 tips for a low-APR credit card

Here are some practical tips to help you secure a lower APR on a credit card:

1. Maintain a strong credit score. A high credit score can get you lower APR offers from credit card issuers and lenders. Regularly monitor your score and work toward growing it by paying bills on time, reducing debt, and avoiding new credit checks. Using EarnIn’s Credit Monitoring tool can help you keep up with your score and find opportunities for improvement.

2. Pay your balance in full. Avoid interest charges by paying your whole credit card balance each billing cycle. This practice avoids finance charges and shows your issuer you’re responsible while saving you from spending your hard-earned money on interest.

3. Explore balance transfer options. If you're dealing with high APRs on existing credit cards and can’t pay them off right away, consider a balance transfer. You could bring your balance over to a card with a lower APR. Just be mindful of balance transfer fees and the terms of the new card to make sure it's a cost-effective move.

4. Negotiate with your issuer. Don't hesitate to contact your credit card company to discuss a lower APR, especially if you have a good history with them. Credit card companies might offer a reduced rate to keep you as a loyal customer.

5. Stay informed about offers. Watch out for new credit card offers in the market. Low introductory APR offers could provide temporary relief from high interest rates, as long as you understand the terms and the APR after the introductory period ends.

Access your money with no APR on EarnIn

It can be hard to make credit card or loan payments on time, especially if you’re waiting for a paycheck. But with EarnIn, you can access your money as you make it — not days or weeks later.

The EarnIn app offers powerful tools and a new set of options with your money. The Cash Out tool lets you access your pay as you work — up to $100/day or up to $750/pay period — with no credit checks, no membership fees, and no interest (aka APR) whatsoever. Plus, EarnIn’s Credit Monitoring tool lets you track your credit score at no cost, so you can keep moving forward. Download the EarnIn app today and experience money at the speed of you.