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Credit Card APR: Everything You Need to Know

Why is it important to understand Credit Card APR?

Are you feeling trapped by credit card debt payments? Paying the minimum or maybe more every month, and still making slow (or even no) progress? There’s a reason it feels that way, and it could be because of your credit card’s APR. 

Credit cards often have higher interest rates compared to other forms of debt, like mortgages or car loans. Due to the high rates of interest, the minimum payments often go towards paying a large part of that interest. Since these payments are only able to pay a small chunk of the original borrowed amount, it can often feel like an uphill task. 

What is Credit Card APR?

Signing up for a new credit card grants you the ability to borrow a certain amount of money. As you pay it off, that amount becomes available again for your use. In exchange for providing this access to money, the issuer will charge you for the use and access. This charge is the Credit Card’s APR.

APR stands for annual percentage rate. This rate shows how much you would be charged for usage of that amount over the course of a year. A low APR means you will have to pay less interest charges. So the higher the APR, the more interest you pay and the more expensive it becomes to borrow that available money. These rates can be fixed, variable, or change over time based on the issuer’s decision.

The APR is different for different credit cards. Even on the same credit card, different types of transactions and purchases may have different APRs. Some transactions are charged at a higher APR, which increases your interest payment amounts. 

  • Variable APR: It changes based on an index rate. In Canada, it follows the bank’s prime rate. Variable rates increase or decrease based on the changes in the prime rate.
  • Fixed APR: It is dependent on the prime rate at the time of entering the agreement and can continue at the same rate for the duration of the term. 

Currently, most credit cards available are variable rate cards.

APR vs. Interest Rate

In terms of credit cards, APR and interest rates are the same thing. If you read the paperwork for a new credit card, it will mention APR.
However, both terms feature a percentage of interest charged against the total borrowed amount. No matter which term is used, you are responsible for paying it on a monthly basis. 

Apart from credit cards, other financial instruments do have some differences between APR and interest rates. For mortgages or car loans, APR includes the fees charged for borrowing the funds, plus the cost of borrowing it (in terms of percentage). Interest, on the other hand, is solely about the percentage of funds borrowed, not including any fees while calculating the total amount. 

Due to this, the credit card’s APR may not always show the full cost of borrowing the funds, but it is a much more simplified calculation. 

Another difference between APR and interest is the usage of the term. APR is always associated with a cost to the borrower. Interest can also be earned by depositing money with a financial institution or via an investment account. This is because you’re depositing money in these institutions, where they can use your funds as capital. In exchange for this access, they pay you money in the form of interest. This type of return is the APY – annual percentage yield.

Types of Credit Card APRs

As we saw above, different types of transactions can have different APRs applied. If you use a credit card for regular purchases like groceries and necessities, you may be spending an amount that can be paid off in full each month. In such cases, it is possible for you to use your credit card completely interest-free. For some types of transactions, however, interest charges kick in immediately after the transaction. This means you would still have to pay interest on that particular transaction even if the balance is fully paid off on time. 

Purchase APR

This is applicable to regular transactions. It is a simple, standard rate that applies to all charges made with the credit card. This can be avoided by paying your bill in full every month on time.

Cash Advance APR

Applicable whenever you withdraw cash at an ATM through your credit card. This is usually a much higher rate compared to say, purchase APRs. It also starts accumulating immediately after the transaction, irrespective of billing cycles or due dates. It’s worth noting that, in addition to a higher APR, there is often a fee associated with cash advances.

Balance Transfer APR

This APR is applicable only when a balance is transferred from other credit cards. These cards often have a higher APR.
However, there are specific balance transfer cards that offer a lower APR on transfers. People will sometimes choose these cards with the goal of reducing the overall payments. This lower (or zero) APR is often a promotional rate, and as such is only available for a limited time.

Penalty APR

When you are unable to make payments on time, the issuer will apply a penalty APR. It is also known as a default APR. Different creditors have different rules – some may apply this APR after 60 days of nonpayment, while others choose to apply this APR only if you pay late more than 2 times in 12 months.

Introductory APR

A temporary rate that is applicable for a specific time period, usually when you open a new account. For example, if you get a new credit card, they might offer a 0% APR for the first 12 months. There could also be similar promotional offers, in which case it would be called Promotional APR.

Once you know what your credit card’s APR is, you can use the right card for the right type of transactions. Maybe you can transfer your balance to a card with a lower APR. If you’re looking for a new card, look for a card that has an attractive introductory APR. This will also help you budget better!

How to find a credit card’s APR

When you apply for a new credit card, federal regulations require financial institutions must provide you with certain information about the card. These guidelines dictate what information must be shared and even how it is to be displayed. The information listed below must be displayed in the form of an information box during the application process.

  • APR interest rates
  • Grace periods
  • Minimum payments
  • Any other fees or charges.

The CG-4 Information box must be at the beginning of the application form, or a separate document that comes with the application.

Factors that affect Credit Card APR

There are a few factors that institutions use to determine your specific APR.

Your credit card APR depends on what lenders call “creditworthiness”. This signifies how much they trust that you will pay back everything you borrow. As your creditworthiness increases, you will be offered better rates.

From this perspective, you can see that creditworthiness depends on the same factors that affect your credit score. Factors like:

  • Payment history – do you have a history of paying back the full bill amount on time? If you’ve missed payments or been behind on repayment, it might lower your score.
  • Credit utilization rate – do you use the full amount available to you? If you use the full available amount every month, it may not reflect well on your overall score.
  • Whether you have defaulted before – if your accounts have been sent to collections, it shows that you have a history of defaulting on payments. They will be less likely to trust your ability to repay the borrowed amount.
  • Your credit history/age – If you have a longer history of timely payments, the lender will be more likely to trust your promptness, which affects both your credit score and creditworthiness.
  • Whether you have opened any new accounts – if you have opened any new accounts, or a lot of accounts in quick succession, this may factor into their calculations. Older accounts in good standing are positive in this case. 

If you have a good credit score, it’s likely you will also qualify to be approved for a new credit card. However, it cannot be used to predict whether you will qualify for a good interest rate or APR.

How does credit card interest work?

There are many factors that determine how exactly the APR is applied, and how much you would be charged:

  • When you usually make payments on your credit card bill
  • Whether you pay in full or part
  • Types of transactions that are carried out
  • Whether the APR you are charged is fixed or variable

Credit Card Interest Formula

The credit card APR is a charge that applies only if the borrower does not pay off their balance in full. In this case, they are carrying the balance forward to the next bill cycle. This means that they will need to pay interest on it. Most companies calculate interest on a daily basis, though there are some that calculate it on a monthly basis.

Daily Interest Calculations

For daily interest calculations on the credit card, we first divide the APR percentage by 365. 

APR/365 = daily interest rate

If your APR is 15%, your daily interest rate would be

15/365 = 0.041

Next, you need to find your average daily balance. To find that, look through your credit card statement or transaction history. Note down the balance of each day, and include purchases, mid-cycle payments, and other fees. If your interest is being compounded daily, you will also have to include that in the overall amount.

Add all the daily balances together, and divide by the number of days in your billing cycle. The number you get is your average daily balance

Now that we have the daily interest rate and average daily balance, you will know your total interest charges for the month. The formula to calculate your total interest charges based on a daily calculation is:

(Daily rate x Average daily balance) x Number of days in billing cycle = Total interest charges for the month

For the example above, at an APR of 15%, your daily rate is 0.041. Assume an average daily balance of $20 and 30 days in the billing cycle.

With steps, it comes to:

(0.041 x 20) x 30 = 0.82 x 30 = 24.6

This means that your total interest charges for this month would be $24.60.

Monthly Interest Calculations

The monthly interest calculation is similar to the daily calculation. The only difference is that the balance owing is charged 1/12th of the APR percentage instead of 1/365th.

The formula to calculate monthly credit card interest is:

(APR ÷ 12) x Current Balance =  Percentage charged for the current billing cycle

If you have a $1000 balance on a credit card, and the APR is 15%, you would be charged 1.25% in interest that month. You can find this number by dividing the APR by the number of months in a year. This brings the amount to $12.50. This is the amount that is added to your total balance, and you may have to pay interest on it in the future. 

For more details about your specific card or APR, you can check the terms and conditions information provided by the credit card issuer. Legally, they must disclose this information to you, so it will be accessible! You can then use this knowledge to make more informed decisions about purchases and increase your bill payment frequency and amounts accordingly.

Effects on the billing cycle

Credit card issuers often use “periodic daily interest charges” for their calculations. These calculate the interest you owe based on the average amount of debt you’re carrying in that particular billing cycle. The calculations are done daily, which means the interest compounds daily. Even if you are carrying the balance on a month-to-month basis, the interest grows every day the balance remains unpaid.

Due to this effect, if you pay off an outstanding balance in the middle of a billing cycle, you will still have to pay outstanding interest charges. This is because even though you paid your balance in full for the previous cycle, you still had daily interest charges that accumulated after the bill date and before it was paid off in full.

How a lower APR can help you pay off debt faster

A lower APR, or interest rate, can help you pay off your debt faster. That’s why it’s important to get the lowest rate possible. It might seem that a few percentage points won’t make much of a difference. However, if you’re going to be carrying a balance, a lower APR can make a huge difference in the payments you will be making. Sometimes, this could mean a difference of thousands of dollars.

For example, if you are carrying a credit card balance of $7,500, your monthly payments would be $225.

At a 15% APR, you would be paying a total interest of $5,219.60 over 18 years and 4 months to pay off your debt.

A 20% APR takes that up to a total interest of $9,115.60 over 23 years and 6 months to be debt-free. You would end up paying more in interest than the total principal amount of $7,500 that you borrowed.

A very large difference in both time and money! A lower APR makes it easier and quicker to pay off your debts. Of course, if you pay off your statement balance in full every month, then you will not be charged any interest. In this case, the APR % would not make a difference at all.

What is a good APR for a credit card?

The lower the APR, the easier it is to pay off your debts. Even if you are debt-free, it is advisable to opt for the lowest APR available to you. In case you ever need to carry a balance on your card, you will end up paying less interest with a lower APR. 

Credit card APRs usually range from 15% to 20%, and can go much higher. It is at the lender’s discretion and decision. Some cards may have APRs of 30% or higher.

In Canada, the Criminal Code specifies a criminal rate of interest, which is 60%. This means that it is illegal for lenders to charge more than 60% effective annual interest rate. This is applicable to most lending products, ranging from credit cards, installment loans, auto loans, lines of credit, and more.

The credit card APR offered to you can be affected by two main factors: the type of credit card, and your credit score.

The type of credit card can affect APR

Different types of credit cards have different APRs. Reward cards that offer perks like a bonus for signing up, or cashback on purchases, usually have a higher APR. General-use credit cards tend to have comparatively lower APRs. Then there are some credit cards that specifically offer lower APRs, but they don’t usually have any additional perks. 

As a general guide, you can safely assume that a card with many perks is likely to have a higher APR. If you have a higher-interest rewards card, you should try to pay off your statement balance in full every month. 

Credit scores can affect card APR

Your credit score influences the rate you qualify for. This factor stands irrespective of the type of card you have.

The higher your score, the lower your rate could be. Keep in mind, lenders will look at your credit history too not just your score. 

By building a track record of timely payments, you can improve your chances of getting a lower APR. If you don’t have good credit, you can anticipate a higher APR. 

How to tell if you got a good interest rate on a credit card

Take a look at the terms and conditions for the card you’re interested in. Since APRs are determined by your creditworthiness, the individual APR offered to each customer may differ. However, the terms and conditions sheet will have a range of what the APR is likely to be.

See what rate you are offered and where it falls in that range. If the APR you were offered falls near the lower end of the range, it means you got a good interest rate. 

An added benefit is that you will also find out how creditworthy you seem to lenders. If your APR is on the higher end, maybe timely payments and paying statement balances in full might help your case. By having a track record of trustworthiness, you may get a better APR the next time you apply for a new card. 

How to lower your credit card APR

Some factors like economic changes may affect your APR, but these are out of your personal control. Others, like missed payments, are within your control, and hence you have the chance to change that.

It’s always preferable to have the lowest APR possible. In case you ever do need to carry a balance, a lower rate minimizes the interest payments you will have to make. A credit card issuer will not lower your APR by themselves, though! You have to ask them for it.

This is part of the many benefits of financial literacy and educating yourself about your finances. It gives you the ability to advocate for yourself and your financial health. You can simply call the customer service helpline, and ask to speak to someone about your interest rate.

Once you are able to speak to someone who can make those decisions, it’s time to negotiate! 

While you’re negotiating, some points might work in your favour:

  • An improvement in your credit score after you opened the account or signed up for the card
  • A history/association with the bank or lender
  • A history of timely payments

In case you don’t have these negotiation points in your favour, wait for some time and build it up. Once you know you’re in better shape, you will be in a stronger position to negotiate.

How to use a high APR credit card wisely

On average, Canadian credit cards have an APR between 19.99% and 25.99%. Credit cards with lower APR are attractive to those looking for a new credit card. However, many people still tend to have cards with higher-than-average interest rates. Often, this is because higher APR cards are also reward cards, and people tend to want more benefits.

High APR credit card guidelines

If you do choose a card with a high APR, here are some best practice recommendations to follow.

  • Use this card only when you know you can pay off the full statement balance every month. If you have a large purchase that will take a few cycles to pay off, put that transaction on a card with a lower APR.
  • If you use the high APR card for rewards and also carry a balance month-to-month, you should use a lower APR card instead. Earning rewards earned is quickly negated by the cost of interest charges.
  • Look into doing a balance transfer if you have a relatively low amount of credit card debt. If you have a plan in place to pay it off, a balance transfer can be good for your finances. It will lower (or eliminate for an introductory period) the interest.
    Find a balance transfer card with the lowest APR possible. Many have introductory periods of 0% APR. The goal is to pay it off fully within the 0% APR promotional period. Before selecting this route, make sure you will be able to pay off the balance within the lower APR period.
    Have a lot of credit card debt? Look into other avenues like credit card consolidation. A consolidation loan or a debt management program will not only help you get on the right track to paying it off but also often provide resources and guidance for viable next steps.

The ideal way to use a high APR card is to pay off the balance in full every month. If you don’t carry a balance at all, you can enjoy all the perks of a rewards card without having to make any interest payments!

Key takeaways about credit card APR

The APR of a credit card is its annual percentage rate. This rate is used to calculate how much you will be charged over the course of the year, for borrowing those funds.

Credit cards tend to have higher interest rates than other forms of loans like mortgages or auto loans.

Remember that the lower the APR, the better. With a lower APR, you will have to pay less interest charges. If you’re planning to carry a balance, choose to do so on a card with a lower APR.

The exact APR you will be offered depends on a variety of factors including creditworthiness. Building a track record of timely payments will help your case if you want to negotiate for a lower APR. 

Remember, the APR charges only apply when you don’t pay off the balance in full. By paying off your full statement balance every month, you will not have to pay any interest.

If you’re in debt with a high APR card, there are services available to help like consolidation and debt management programs. They can reduce your credit card debt significantly. Not to mention, a lower APR can also help you pay off your debt sooner.

Improving your credit score will lead to offers for credit cards with lower APR.

With this knowledge of how APR works and how it can help you get out of debt sooner, it’s time to take action. Advocate for yourself and build a healthy financial life. Reach out to us for a consultation and we’d be happy to help you through the process. 

Frequently Asked Questions

Q: Does APR matter if you pay on time?

A:  Paying your bill on time does not stop interest charges from accumulating. If you’re paying only the minimum payment required, you are being charged interest every cycle. The calculation starts as soon as the payment due date passes or the grace period ends. The only way to avoid interest charges is if you pay your bill in full every month, and on time.

By paying your statement balance in full every month before the due date, you avoid interest charges. The APR only comes into play when you’re carrying a balance. If you pay off your credit card bill in full every month, then great news – the APR% of your card makes no difference in your case!

Q: What is deferred interest?

A: Deferred interest is a type of promotional APR. During the deferment period, interest charges are low or even zero.

Note that this is not the same as a 0% or low introductory APR. Deferred interest simply means charges are applied at the end of the promotional period. If you are not able to pay off your full amount before this deferment period ends, you will be charged interest on the entire amount – including the part you’ve already paid off.

If you’re using a card with a deferred interest promotion, make sure you pay off the balance in full before the deferment period ends.

Q: Can my credit card APR change?

A: Yes, credit card APR can change for a variety of reasons. Credit cards usually have variable rates which can change depending on market conditions. Fixed-rate cards are relatively rare.

Your credit card information and documentation would usually specify base APRs so you can see the range and what the rates might be if the market changed. There’s also a maximum APR they specify, so there’s a limit to how high they can raise your APR. 

If you haven’t paid your bills for over 60 days, your credit card APR may change. Non-payment is a violation of the credit card agreement, and the issuer has the authority to change the interest rate without providing prior notice. This is a penalty APR, and it may remain on your card even after you’ve paid off the overdue balance. It is then up to the issuer’s discretion. 

Q: How can I reduce my credit card interest rate?

A: If you’re unhappy with how high your credit card APR is, there are a few options available to you. You could ask the issuer to reduce your APR, especially if you have built up a history of timely payments and no defaults. It also helps if you are able to improve your credit score. 

If that doesn’t work and your high APR is contributing to financial strain, try to get a balance transfer to a card with zero or low introductory APR. This will help you pay off more of the borrowed amount without having to pay high interest rates for the introductory period.

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