A guide to credit card APR

If you’ve ever applied for a credit card, or another financial product, you’ll almost certainly have seen the term APR. Here’s everything you need to know about credit card APR.

If you’ve ever applied for a credit card, or another financial product, you’ll almost certainly have seen the term APR. Here’s everything you need to know about credit card APR.

Anelda Knoesen
From the Money team
6
minute read
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Posted 3 JUNE 2021

What is credit card APR?

The APR – or annual percentage rate – is what your borrowing will cost you each year. It’s calculated by taking into account the rate of interest, along with any other standard charges, like an annual fee.

For credit cards, APR can be very helpful when comparing deals because you can work out the cost of credit from different providers. All lenders have to tell customers the APR based on an assumed credit limit of £1,200. 

But, while APR is good for making comparisons, the first thing to consider when you’re looking to borrow credit is whether or not it’s a smart financial decision based on your circumstances.

How does credit card APR work? 

APR is designed to give you a clearer understanding of how much you’ll repay overall when you borrow money. Even so, the actual figure depends on how and when you pay off your debt. It’s especially tricky with credit cards as they have flexible payments and your provider will usually calculate interest monthly, so it’s best just to use the APR as a rough guide.

For most cards, you can avoid paying interest altogether if you clear your balance in full each month by the due date. If you don’t, you’ll have to pay interest on your purchases (unless you’re on a 0% promotional deal).

Let’s say your credit card has an APR of 20%. If you borrow £1,000 and don’t pay any of it back, it will cost you £200 in interest over the course of a year. To find the monthly interest rate, you simply divide the APR by 12.

This is a very basic example to show you how APR works in principle. In reality, it’s a little more complicated than that because of compound interest, other fees and how much of the debt is outstanding.

What is representative APR on a credit card? 

When you’re comparing credit cards, you’ll usually see the term ‘representative APR’. This is only an example of the rate you could get as lenders can’t tell you your exact APR until you apply.

To advertise the representative rate, the lender needs to offer it to at least 51% of customers who successfully apply. Other customers are likely to be charged a higher rate (assuming they’re offered one at all). Not everyone applying for credit has, in the eyes of a lender, the same chance of managing their credit effectively. Having a good credit rating means you're more likely to get the representative APR.

What’s not included in representative credit card APR? 

When it comes to credit cards, the representative APR assumes you only use the card for purchases (as that’s what most people do). It doesn’t take into account other rates and fees that might apply if you use the card in different ways, like for balance transfers or cash withdrawals (although you should always avoid using a credit card to get cash).

The representative APR only includes compulsory charges you’ll have to pay back. It doesn't include fees or charges for late payments, going over your credit limit or returned payments, for example.

Why could a rate of interest vary from what I actually pay back? 

The other important thing to think about when it comes to credit card interest rates is what’s known as compound interest. With compound interest, you don’t just accrue interest on the money you borrow over the course of a year. Instead, the sum you’ll be liable to pay back would increase in year two – as the actual figure would include any interest added on to the original interest rate from the first year. We know it’s a lot to get your head around, but it can make a big difference – especially when it comes to borrowing larger sums over a long period of time.

What else should I think about when it comes to APR? 

While representative APR helps you compare cards, the rate you see might not match up with what a card actually costs you. That will depend on how you use the card and how much you can repay each month. Representative APR assumes that you spend the full £1,200 on the first day, then don’t spend anything else on the card. 

Credit card providers will often try to tempt you in with rewards credit cards or cashback cards. You should be honest with yourself about whether these are going to work for you in the long run, or whether you’d be better going for a card offering a more competitive APR rate or another type of benefit. To avoid any surprises when it comes to charges, it’s important to read the terms and conditions of your credit card with care.

Where can I compare credit cards? 

Here at Compare the Market, we let you compare credit cards quickly and easily with our eligibility checker, without impacting your credit score. The results can help you to avoid applying for credit cards that you’re likely to be turned down for. You can also filter your choices by card type, so it’s super-easy to find the right deal for you. 

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

Frequently asked questions

What is personal APR?

Personal APR is the rate you’re offered after you’ve applied for a credit card. It’s based on your personal circumstances and influenced by your credit score, salary and household finances.

It might be the same as the representative APR you saw advertised, but it could be higher.

What is variable APR?

Variable APRs are commonly used for credit cards. This means the APR may change over time because the rate isn’t set in stone. While there are several reasons why variable APRs change, many track the Bank of England interest rate and go up or down accordingly.

Is APR always the most important feature of a credit card?

While APR is one of the main things to think about when you’re comparing credit cards, you should also weigh up the benefits and drawbacks of each card. Look at the features that will be most important to you, based on how you plan to use the card. 

For instance, if you’re intending to use the card mostly for shopping and are confident you’ll be able to pay off the balance in full each month, a rewards card or cashback credit card could be a good option. Although the APR is often high on these types of card, this won’t matter if you clear your balance each month. 

What is a good APR on a credit card?

To get a good APR, you’ll usually need a good credit score. Standard credit cards typically charge around 18% to 22% APR. Anything significantly higher than this is on the expensive side.

You can get credit cards that won’t charge you any interest for a certain length of time. 0% purchase and balance transfer credit cards can give you interest-free payments for between about three and 30 months. Once the introductory period ends, you’ll usually be automatically moved on to the much higher standard variable rate of interest though, so it’s a good idea to pay off the card before then.

How can I lower my credit card APR?

One way to get a lower interest rate is by switching to a different card. If you have a good credit rating, you might be able to move your existing credit card balance to another card offering a low or 0% deal. 

Low APR credit cards can be a good way to shift debt and borrow for the long term, although credit limits tend to be low. 

Above all, a good credit score can help you get the rate you’re looking for. Read our handy guide to find out how to build your credit score.

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