Annual Percentage Rate (APR) is a way of stating the interest rate that will be paid on a loan that includes one-time fees and other expenses that the consumer will pay.

The annual percentage rate is designed to represent the overall annual cost of a loan or line of credit to the borrower. Consequently, the annual percentage rate is intended to make it easier for consumers to fairly compare various lenders and loan or credit products.

When comparing credit cards, the annual percentage rate can be used to calculate the interest you will pay on a credit card balance over the course of the year.

For example, if you were to transfer a $10,000 balance to a new credit card with a 12% annual percentage rate, you could expect to pay approximately $1,200 in interest on that loan in one year, or $120 monthly.

The actual amount of interest you pay will depend on how much of the balance you pay each month.

This is because though the credit card’s interest rate is expressed as an annual percentage rate, credit cards actually calculate interest on a daily basis.

For example, if one month you pay off $1,000 of your $10,000 balance, the next month you will pay approximately $100 in interest.
It is also important to note that an APR does not include any fees, including annual fees, balance transfer fees, late fees, over limit fees, or cash advance fees that you may incur, so it does not always represent the total cost of a particular credit card.

Annual Percentage Rate Disclosure

In the United States, creditors are required to disclose the annual percentage rate to consumers before you apply for the credit card. The APR is not, however, always prominently displayed.

Most online applications will have a link either at the top or the bottom of the application page that says something like “Terms and Disclosures”. Click it to find out important information including the annual percentage rate, credit card fees, credit limit, and grace period.

Despite this disclosure law, the you may not receive a card with the APR listed. Why not? Card companies usually include a clause in their terms that says the final APR will be determined by the applicant’s creditworthiness.

Thus, the annual percentage rate on the disclosure will be what the credit card company will offer to customers with near-perfect credit. They may still issue a card to an applicant with average or poor credit, but that applicants APR will be higher.

Fixed vs. Variable Annual Percentage Rates (APRs)

Fixed vs Variable APRs

Another difference you will see in APRs is that there are variable APRs and fixed APRs.

A fixed annual percentage rate means that the interest rate will not change according to changing economic markets. That’s not to say the credit card company will never raise the APR. Your APR can always go up if you are late with a payment or whenever the credit card company wants to raise it, so long as they send you written notification.

Most credit cards carry a variable annual percentage rate, meaning the interest rates will fluctuate with the changing prime interest rate. The prime rate is set by the Federal Reserve and, essentially, is what banks can borrow money for.

Variable rates are not necessarily a bad thing, but your interest rate will fluctuate. As the economy gets stronger and interest rates go up, you’ll pay more. On the flip side, if the economy goes sour, rates tend to go down as well, meaning you’ll have a lower interest rate.