How to Calculate APR On a Credit Cards and Understand Your Costs

The annual percentage rate (APR) on a credit card represents the total cost of borrowing money and using credit. It factors in the interest rate as well as certain fees to give you a complete picture of how much you’ll pay.

Knowing how to calculate APR enables you to compare cards and make informed decisions about which offers the most affordable financing. This article explains what goes into the APR equation and why it matters.

What is APR on a Credit Card?

APR stands for annual percentage rate. It shows the yearly cost of borrowing money or carrying a balance on your credit card.

The APR includes:

• Interest charges
• Account fees
• Transaction fees

It does not include penalty fees like late payment fees or over-limit fees. Those are billed separately.

Your credit card APR is expressed as a percentage rate. For example, an APR of 17.99% on a $1,000 balance would cost $179.90 in interest and fees over one year.

The higher the APR, the more expensive it is to carry debt from month to month. This is why lowering your APR can result in significant interest savings over time.

READ ALSO: How to Calculate APR on a Car Loan

How APR is Calculated for Credit Cards

Credit card companies use the following steps to calculate your APR for each billing cycle:

1. Determine the Daily Periodic Rate (DPR)

First, they have to convert your annual percentage rate into a daily rate. This is done by dividing the APR by 365 (the number of days in a year):

APR / 365 days = Daily Periodic Rate

For example, if your card has a 15% APR:

15% / 365 = 0.041% DPR

2. Calculate Your Average Daily Balance

Next, the card issuer tallies your average daily balance for the billing period. This is the average amount owed each day over the full billing cycle.

They take your balance at the end of each day, add them all up, and divide by the number of days in the billing period. This accounts for fluctuations due to new transactions, payments, fees, and accumulated interest.

3. Multiply the DPR by Your Average Daily Balance

Your average daily balance gets multiplied by the daily periodic rate to determine how much interest you owe for that billing cycle:

Average Daily Balance x DPR = Interest Charges

4. Add Any Applicable Fees

Finally, any annual fees, balance transfer fees, or other charges outlined in your cardmember agreement get tacked on to reach your total costs for the billing period.

This amount appears on your statement as interest charges and fees. Multiply it by 12 to project your potential annual borrowing costs at that rate.

Why Your Credit Card APR Matters

The APR on a credit card is significant for several reasons:

• It determines how much revolving debt costs you in interest. The higher the APR, the more interest you pay when carrying a balance.
• It allows you to compare credit cards and select the most affordable option. Lower APR cards charge less in fees and interest.
• It impacts how long it will take to pay off your balance. The higher the APR, the more of your payment goes toward interest rather than the principal amount owed.
• It’s the true cost of borrowing, including all applicable fees. APR gives a complete view of how much you’ll pay, not just the interest rate alone.
• It sets expectations for how expensive financing purchases or taking cash advances may be. Knowing the APR helps prevent “sticker shock” at high revolving balances.

Considering APR (not just rates) when applying for new credit or deciding which card to use for purchases can potentially save you hundreds of dollars in interest expenses.

Factors That Influence Your Credit Card APR

Several variables determine the APR you are offered on a new credit card or existing account:

1. Prime Rate

The prime rate is a benchmark interest rate set by the nation’s banks. It fluctuates over time based on the federal funds rate. Credit card rates are often tied to the prime rate plus an additional percentage known as the margin.

For example, your card’s APR might be the prime rate plus 10% margin. If the prime rate is 5%, your APR would be 15%. If it goes up to 6%, your APR would increase to 16%.

This means the prime rate indirectly impacts what APR lenders can offer you. When it is low, credit card APRs decline as well.

2. Credit Score

Your credit score is one of the top factors affecting your interest rates and qualification for the best credit card offers. Consumers with excellent credit often receive lower APRs.

FICO scores below 670 are typically considered subprime. This often leads to higher APRs. Building a strong credit profile is key to accessing cards with competitive rates.

3. Credit Card Type

Interest rates and fees vary depending on the type of credit card. For example:

• Rewards cards tend to have higher APRs than non-rewards cards
• Business cards may have different APR ranges than consumer cards
• Secured cards require an upfront security deposit to access credit, but APRs are often sky-high
• Low interest rate cards offer APRs below average but fewer perks

Be sure to compare similar types of cards when shopping for the best APR.

4. Introductory Offers

Many credit card companies offer temporary teaser rates on new cards or special financing offers. Common options include:

• 0% intro APR for 12-18 months on purchases and/or balance transfers
• Reduced interest rate for 6-12 months

These short-term incentives allow you to save on interest before the standard variable APR takes effect. Make sure you know when the intro period ends.

5. Your Credit History

New credit applicants with a limited history tend to get less favorable APR offers. Having several years of positive credit experience helps demonstrate lower risk.

Your payment history also matters. On-time payments lead to better rates. Late payments or past balances in collections can increase your APR.

6. Economic Factors

When the economy is thriving, lenders tend to compete by offering lower rate credit cards. But in troubled or uncertain economies, rates may rise across the board as banks try to reduce lending risks. This trend indirectly impacts the APRs advertised.

Consider the big picture economic outlook along with your personal finances when evaluating new credit options.

Estimating Your Credit Card APR

You can estimate your potential APR range by examining your credit report and score factors. Start by looking up the current prime rate, which forms the foundation for variable rate cards.

Next, check your credit score and history to estimate your risk tier. Credit scores above 700 typically qualify you for the lowest advertised rates and below-average APR offers. Those under 600 will almost certainly mean higher interest rates.

Finally, compare your situation and profile to the average APR statistics:

• Average credit card APR across all types of borrowers: 18% – 22%
• Average for borrowers with excellent credit: 13% – 20%
• Average for borrowers with fair credit: 22% – 25%
• Average for borrowers with very poor credit: 28%+

Adjust 10% in either direction based on your specific credit score and history. This will give you a ballpark estimate of the APR offers you can expect.

Of course, the terms of each individual card also impact the precise APR. Reading the Schumer box fee disclosures in credit card offers reveals the exact rates and costs that the lender may charge you.

READ ALSO: How to Calculate APR on a Car Loan

Tips for Getting a Low APR on a Credit Card

Here are some tips to qualify for credit cards with lower APRs to minimize interest fees:

• Maintain a credit score over 700 through responsible borrowing and on-time payments
• Reduce your debt-to-income ratio by limiting balances on existing accounts
• Look for cards that offer 0% introductory APRs on purchases or balance transfers
• Consider cards marketed as “low interest rate” options that promote APRs below the average
• Be willing to accept lower borrowing limits or forgo rewards offers to secure better rates
• Compare both interest rates and APRs when applying to find the real cost of financing
• Ask issuers about hardship programs or temporary rate reductions if you face financial struggles

A combination of good financial habits, smart shopping, and researching the fine print can help you gain access to more affordable overall borrowing costs.

Estimating Interest Costs Based on APR

Once you know your applicable APR, you can estimate how much interest you’ll pay over time based on your expected credit card usage and balances.

For example, let’s assume:

• Credit card APR: 22%
• Average daily balance: $2,500
• 30 days in the billing period

1. To Calculate the Daily Periodic Rate

Convert the 22% APR to a daily rate:

22% / 365 days = 0.060%

2. To Determine the Interest Per Day

Multiply the daily periodic rate by your average daily balance:

0.060% * $2,500 = $1.50 interest per day

3. To Calculate the Total Interest for the Billing Period

Multiply the daily interest amount by the number of days in the billing period:

$1.50 * 30 days = $45 total interest

This shows you would accrue $45 in credit card interest charges based on a $2,500 balance at 22% APR over 30 days.

Do this calculation each billing cycle to estimate your ongoing interest expenses based on real balances and APRs.

Over 12 months, that same average daily balance would cost $540 in interest at a 22% APR.

How Lower APRs Save Money

The higher your APR, the more rapidly interest costs accumulate when carrying revolving credit card balances. Let’s compare the savings from lowering your rate:

• Average Daily Balance: $5,000

• Billing Period: 30 days

By qualifying for a credit card with a lower APR, you can save hundreds of dollars in interest charges annually on the same outstanding balance.

This demonstrates why it pays off to shop around and negotiate the best possible rate for your situation when applying for new credit or requesting an APR reduction. A few percentage points make a significant difference.

Ways to Lower Your Current Credit Card APR

If you currently pay high interest rates on your credit cards, you may wonder how to reduce your APR and save money. Consider these tactics:

• Call and request an APR reduction after 12+ months of on-time payments
• Transfer balances to a lower APR card (watch for transfer fees)
• Improve your credit score through responsible habits over 6+ months
• Consolidate and roll balances into a lower rate personal loan
• Negotiate a hardship program if you face financial struggles

When asking issuers for a lower APR, emphasize your history of responsible credit management. Come prepared with documentation of income, budget, and reasons why you deserve a break on rates.

APR vs. Interest Rate: What’s the Difference?

New credit card users often confuse APR and interest rates. How do they differ when it comes to revolving credit costs?

Interest Rate – The base rate used to calculate the cost of borrowing money on a credit card. Displayed as a percentage.

APR – The annual percentage rate, including the interest rate plus certain fees linked to the account terms over 12 months.

In other words:

• Interest rate is a component of APR
• APR shows the total borrowing costs
• Interest rates set the basic pricing
• APR includes fees that increase the overall expense

This means APR gives a more accurate picture of how much you pay to use credit compared to the interest rate alone. You’ll want to consider both when evaluating credit cards.

Credit Card APRs: The Bottom Line

Now you understand what goes into credit card APRs and how lenders calculate your costs each billing cycle. The key takeaways include:

• APR represents the total annual cost of borrowing, including interest and fees.
• It’s calculated from your daily periodic interest rate and average daily balance.
• Higher credit card APRs increase interest expenses when carrying a revolving balance.
• Your creditworthiness largely determines the APR offers available to you.
• Asking for a lower rate can potentially save you hundreds on interest charges.

Knowing how to estimate your APR, shop for the best offers, and reduce rates can pay off by making credit more affordable long-term.

Frequently Asked Questions About Credit Card APR

If you still have questions about annual percentage rates for credit cards, here are answers to some popular questions on the topic:

How is credit card APR calculated?

Credit card companies calculate your APR each billing cycle by first converting the annual rate to a daily periodic rate. They multiply this daily rate by your average daily balance to determine interest owed. Fees are added to get your total costs for the period.

What’s a good APR for excellent credit?

For borrowers with credit scores of 720 or higher, an excellent APR is generally 13% – 20%, compared to the average APR of 18% – 22%. Maintaining robust credit can qualify you for rates on the low end of that range.

What credit card has the lowest APR?

The lowest credit card APRs are typically 0% introductory rate offers that last for 12-18 months. But when comparing long-term rates, some of the lowest APR cards include certain credit union cards with rates as low as 6% – 10%.

Is a higher or lower APR better?

A lower credit card APR is almost always better, as it indicates lower costs of borrowing and interest fees. You generally want the lowest APR possible based on your creditworthiness. Higher APRs mean you’ll pay more interest on any revolving balances.

What’s the average APR on credit cards today?

The current average APR on credit cards is approximately 20% across all types of borrowers and credit scores. The precise average rate you’ll qualify for depends significantly on your credit profile and history.

Does requesting a lower APR hurt your credit?

It’s unlikely that requesting a lower APR will hurt your credit. Hard inquiries from applying for new credit impact scores more. As long as you’ve been a responsible cardholder, there’s minimal risk to asking for a better rate on an existing account.

Understanding how APRs work and ways to reduce your rate can lead to substantial interest savings over time. Evaluating credit options based on true annual costs, not just interest rates, helps identify the most cost-effective borrowing options.

In another related article, Best 0% Interest Credit Cards with 0% Intro APR Period Until 2025