Everything you need to know about credit card APRs

If you're looking for a new credit card and you keep seeing the term annual percentage rate, or APR, you may be wondering if that's a number you should pay attention to.

Yes, you should, advises Robert Steen, USAA Advice Director. “In a nutshell, APR is the price you pay in interest to borrow money.”

If you're borrowing money for a big purchase, like a car or a house, the interest rate can make a difference in how much you'll pay over the life of your loan. It's also an important term to understand about a new credit card.

“The APR is just one factor to consider when you're applying for a credit card,” Steen says. “But it's important because it could have a big impact on your payments if you do not pay off your balance every month. If you always pay off your balance in full by the due date each month, you'll typically just pay the amount you charged on the card without any interest.”

Keep in mind that cash advances and other transactions may accrue interest differently from everyday purchases. The rate on your credit card for cash advance transactions will vary, based on your credit card issuer and the terms of your cardholder agreement. View your credit card statement for the most accurate rate information. But if you're one of the many Americans who carry a balance from month to month, the APR will determine how much interest you're charged on the unpaid portion.

What's a typical APR?

The average APR for credit card accounts can change over time, and typically moves in the direction of the Federal Reserve's Prime Rate. You may be offered a lower APR if you have good credit. Or it could be higher if your credit score is less than desirable.

How is interest calculated? Typically, interest on a credit card is based on the average outstanding balance each day of the billing cycle.

Keep in mind that interest is calculated separately for purchase APRs, balance transfer APRs and cash advance APRs. Your statement must show each of these different types of balances and the APR that applies to each, according to the Consumer Financial Protection Bureau (Opens in New Window).^{See note1}

How the APR affects the total cost of your purchase

When it's just a number on your statement, the APR may seem insignificant. But when you think about how it impacts your ability to buy the things you want, it can be a powerful driver of your financial habits.

Let's say you buy a new mountain bike for $600 and you put it on your credit card. For now, you can only afford to pay $100, so you carry a $500 balance into the next month. If your APR is 20%, you'd have to pay $8.33 in interest for that month — assuming you didn't charge anything else to your credit card or have a previous balance.

That may seem like a small price to pay to have a new mountain bike, but the problem grows more pronounced when your debt snowballs or you only make minimum payments. According to Experian, the average credit card balance in 2022 was $5,221 (Opens in New Window).^{See note1} So if we return to our earlier example, where the APR is 20%, and your average daily balance is $5,221, you'd end up paying $87.02 in interest — just in one month.

Different kinds of APRs

There are different types of APRs, ranging from cash advance APRs to introductory APRs. Regardless of the type, an APR is either fixed or variable.

If you get a fixed rate, it's locked in for a certain period of time. “Fixed-rate APRs are easy to budget for because you know what to expect,” says Steen. “Usually, however, people associate fixed-rate APRs with mortgages and car loans, not credit cards.”

While some credit cards have a fixed-rate APR, most are variable. A variable APR is usually tied to the prime rate, an index interest rate that changes over time. That means if the prime rate increases, your variable APR does, too. In addition to the prime rate, banks typically add a number of percentage points called the margin to the prime rate, and that sum is the APR.

“When you have a variable rate APR, you want to keep an eye on it because it can increase or decrease over time. An increase may negatively impact your budget without your even realizing it,” says Steen. “If rates begin to rise, the higher rates will increase the amount of interest you pay each month, which means you'll have a higher ‘minimum payment due.'”

Be aware of the following APR types:

• Purchase APRs refer to the interest rate applied to any new purchases, including online, in-person or over-the-phone purchase you make with your credit card.
• Cash Advance APRs are used if you borrow cash from your credit card. It's usually higher than the purchase APR, and can apply to cash, convenience checks or cash-equivalent purchases such as cryptocurrency and gambling-related expenses. You may incur a cash advance fee as well, in addition to the APR.
• Introductory APRs are often attached to a new credit card and tend to be lower — but for a limited-time only. Be sure you're aware of when that introductory period ends.
• Promotional APRs refer to low interest rates offered on certain credit card balances for a certain limited period of time. Under federal law, this period must be at least six months.
• Balance Transfer APRs apply to balances you transfer from one credit card to another and may include an introductory or promotional APR for a period of time. You may be charged a fee in addition to the APR on balance transfers.
• Penalty APRs usually come into play if you violate the terms of your card by missing a payment or making a late payment.
• APR grace period refers to the amount of time — usually around 25 days — that you have to pay off your balance without getting charged interest.

Depending on the account, you may have different APRs for different transaction types. For example, a purchase may have one, while a cash advance has another.

The difference between APR and APY

It's easy to get confused when learning the difference between APR and annual percentage yield, or APY. While the acronyms are similar and they're both used for financial calculations, they're actually very different.

APY applies when you're calculating how much interest you earn on your savings after compounding the interest in the account. This could be in a savings account or sometimes a checking account at the bank, but not from borrowing. For example, if you save money in a savings account with an APY of 0.5%, and you were to put $5,000 into it, you'd earn $25.06 in total interest over the course of one year, if you do not make any withdrawals from the money deposited or interest earned.

The higher the APY, the more you potentially earn on your savings. The higher the APR, on the other hand, the more interest you pay on your credit card balances.

Does being in the military affect my APR?

Thanks to the Servicemembers Civil Relief Act, or SCRA, people in active duty military service who incurred debt prior to entering active duty are entitled to a 6% interest rate limit for most types of debt, according to the Consumer Financial Protection Bureau (Opens in New Window).^{See note1}

Know that you'll need to provide your lender with a copy of your service orders so they know the date that impacts your interest rate reduction. “Not only can you request this rate reduction while you're on active duty,” Steen says, “but you also have up to 180 days after your release from active duty (Opens in New Window)".^{See note1}

The Military Lending Act also protects military members, capping the amount a creditor may charge in interest and fees at 36% (Opens in New Window).^{See note1} MLA regulations are meant to help protect military service members from predatory lending practices, while SCRA aims to provide temporary financial relief so that service members can focus on military obligations.

What affects the APR I'm offered?

Generally, the APR a lender offers you is based on your creditworthiness, which is influenced by a number of factors. So the best thing you can do is maintain a good credit score. “Typically, the higher your credit score, the lower your APR,” says Steen. “Other factors beyond your credit score may be considered as well.”

To some degree, your APR will also depend on the type of credit card you have. Rewards, such as points, mileage or cashback, are typically offered on credit cards that are more likely to have higher APRs.

Learn more about the steps you can take to boost your creditworthiness in our article, Good credit: Your guide to getting it and keeping it.

The USAA Advice Center provides general advice, tools and resources to guide your journey. Content may mention products, features or services that USAA Federal Savings Bank does not offer. The information contained is provided for informational purposes only and is not intended to represent any endorsement, expressed or implied, by USAA or any affiliates. All information provided is subject to change without notice.