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There are millions of credit card users in the US, the majority of whom will carry a balance on their card at some point in time. Understanding how the interest charges work will not only help you better understand your bill, it will allow you to make better financial decisions for your business.

This guide will provide you with a brief overview of APR and Prime Rate, summarize the various types of APR that may apply to your card, and provide you with some tips to avoid interest charges.


Annual Percentage Rate, commonly referred to as APR, is a lender’s term for the interest that can be applied to your credit card. Generally speaking, all purchases, cash advances, and balance transfers will be subject to an APR. These rates vary from card to card and will depend heavily on an applicant’s credit score and the type of rewards offered by the lender.

Although the term APR reflects an annual interest rate, your credit card company will use this rate to calculate interest charges each month. Similar to miles per hour, this figure can be used to easily calculate figures over longer and shorter periods of time. If you want to figure out how much interest you are paying per day, simply divide your APR by 365. Your credit card company will take your balance that is subject to interest and multiply that by the daily rate. This daily interest charge is then added to your balance the next day. This is called compounding.


Oftentimes, credit card companies will determine their APR based off of the Prime Rate plus a percentage that they determine. The prime rate is reported by the Wall Street Journal and is typically around 3% of the federal funds rate, the interest rate that banks charge other banks to lend them money for their reserve balances each night.

The Prime Rate can be very important to consumers that have variable interest rates. For instance, your credit card might charge Prime + 15.5%. This total would be your APR. If the Prime Rate stays low, that is good for you as a consumer. But, should the Prime Rate soar, so will your interest rate.


It is absolutely essential that you read an understand your credit card’s terms before you start using it. Most credit cards have separate APRs that will apply in different situations, including purchases and cash advances. By knowing which APR will apply to each situation it will help you make informed decisions as a cardholder.


Many credit card companies will entice new customers by offering a low (or 0%) APR for a specified period of time. This may apply to purchases, balance transfers, or both. If your card offers a special introductory offer on balance transfers, be sure to check and see if there is any kind of processing fee in lieu of paying an interest rate. In addition, if you take advantage of an introductory APR, be sure to always pay the minimum payment on time or your entire balance may revert to the purchase or penalty APR.


The Purchase APR is generally most relevant to the everyday usage of your card. This is the interest rate that will be applied to all purchases made with your credit card. Consumers with excellent credit scores are typically offered lower Purchase APRs than consumers with fair or good scores.


Your creditor may apply a Penalty APR if you have violated your card’s terms and conditions, which often includes making late or insufficient payments. This rate is usually the highest APR and can be close to 30%. Your card’s Penalty APR will be clearly spelled out in the documentation they send you along with your card.


If you transfer your balance from one credit card to another, a special Balance Transfer APR is typically applied. Some cards offer 0% APR on balance transfers for a select period of time, after which balance transfer APRs are often equal to the Purchase APR. Balance transfer APR details can be found in the paperwork sent with your card or online.


The second highest APRs associated with credit cards are typically Cash Advance APRs. This special APR is applied to any cash that is withdrawn from an ATM or via other cash withdrawal methods. Keep in mind that Cash Advance APRs typically do not come with the same grace period as purchases, which means you’ll immediately start accruing interest.


Just because interest charges can apply to your purchases, it doesn’t mean they have to. Generally speaking, credit cards will provide cardholders with at least a 21-day grace period, during which time they can pay their balances in-full without incurring any interest charges. Many cardholders will make small, regular purchases on their card each month and pay them off within the grace period. This is an excellent way to keep your card in good standing and to improve your credit score.

Knowing the finer details of APRs and how they are calculated isn’t absolutely essential. What is crucial, however, is knowing what APRs apply to your card and what your grace period is. By thoroughly understanding your card’s terms and conditions, and properly leveraging your grace period, you can save money and make the most out of your credit cards.

Editorial disclaimer: The content on this page is not provided by any of the companies mentioned and has not been reviewed, approved or otherwise endorsed by any of these entities. All opinions expressed here are the author's alone.