Credit card APR

Card APRs work differently

On a mortgage, the APR bundles the interest rate together with the lender’s fees. On a credit card it does not. A card’s APR is simply the periodic rate multiplied by the number of periods in a year — the annual fee, late fees and cash advance fees sit outside it.

That is why a card with a $550 annual fee and one with none can advertise the same APR. For revolving credit the APR tells you the price of carrying a balance, and nothing about the price of holding the card.

You have several APRs, not one

Open any cardholder agreement and you will find a table:

Purchase APR — applies to what you buy, and only if you carry a balance past the grace period.

Balance transfer APR — often a promotional rate for a fixed window. The transfer fee, typically 3–5% of the amount moved, is not in the APR.

Cash advance APR — nearly always the highest, and it starts accruing immediately. There is no grace period on cash, and the cash advance fee is charged on top.

Penalty APR — what your rate becomes after a serious delinquency. It can apply indefinitely to existing balances if you were more than 60 days late.

Introductory APR — usually 0% for a set number of months, after which the go-to rate takes over.

Payments are applied to the highest-APR balance first for anything above the minimum, which is required by law and works in your favor.

The grace period is the whole game

If you pay your statement balance in full every month, your purchase APR is irrelevant — you are not charged interest at all. That is the grace period, and it typically runs at least 21 days from the close of the billing cycle.

Carry any balance and the grace period usually disappears until you pay in full again. New purchases then start accruing interest from the day they post, which is why “I only carried a small balance” often produces a larger interest charge than expected.

Cash advances never get a grace period.

How the interest is actually computed

Issuers convert the APR to a daily periodic rate by dividing by 365, then apply it to your balance each day and compound.

Most use the average daily balance method: add up the balance on every day of the cycle, divide by the number of days, and multiply by the daily rate times the days in the cycle. Some include new purchases in that average, some exclude them, and a few use two-cycle averaging — the agreement says which.

A worked figure: on a 22.99% card carrying an average daily balance of $4,000 over a 30-day cycle, the daily rate is 0.06299%, and the interest charge is about $75.58. Because it compounds daily, the effective annual cost is around 25.8% — see APR vs APY.

Variable rates and when they can change

Nearly all card APRs are variable: a fixed margin added to the prime rate. When prime moves, your APR moves with it the next billing cycle, and no notice is required because the change is in the index rather than the terms.

For changes the issuer initiates, the CARD Act sets limits. Your rate generally cannot be increased during the first year, and increases on existing balances are restricted unless you are more than 60 days delinquent, a promotional period ends as disclosed, or the increase is driven by the index. Otherwise the issuer must give 45 days’ notice, and the new rate applies to future purchases rather than your existing balance.

What to actually compare

If you pay in full monthly, ignore the APR and compare annual fees and rewards. If you carry a balance, the APR is the dominant cost and rewards are almost never worth a higher one. And if you are transferring a balance, compute the transfer fee as an up-front cost against the interest saved — a 3% fee to escape a 24% rate pays for itself in about seven weeks, but only if you clear the balance before the promotional window closes.