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
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Posted 9 JANUARY 2020

What is APR?

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 – on a credit card or another type of borrowing – along with any other standard charges, such as an annual fee.  

For credit cards, APR is used to compare deals because you can work out the cost of credit from different providers; it’s based on an assumed credit limit of £1,200. Remember, 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 representative APR work for credit cards?

Representative APR is the advertised rate which 51% of successful applicants would be given. The rest are likely to get 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. Put simply, having a good credit rating means you're more likely to get the representative APR.  

When it comes to credit cards, the rate for purchases can also be used to advertise the card. This rate won’t take into account certain charges which a credit card could be used for – such as balance transfers or cash withdrawals. So, the percentage rate you see will not include the total rate of interest you might actually have to pay.  

The representative APR rate includes any compulsory charges you’d have to pay back regardless of your spending habits, for example a monthly fee. If there are no additional fees, a representative APR will typically be the same as the purchase rate. But be aware that a representative rate doesn't include any fees or charges for things like late payments, going over your credit limit or returned payments.

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

The other (important) factor to take into account for interest rates you see on a credit card 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 need to include any interest added on to the original interest rate from the first year. This can make a big difference – especially when it comes to borrowing larger sums over a long period of time.

So, let’s say you borrowed £1,000 on credit at an interest rate of 10% a year. It will cost you 10% of the amount borrowed in order to do so. Therefore the cost of borrowing £1,000 over one year would be £1,100. 

Borrowing costs APR APR costs Total additional repayment
Year 1: £1,000 10% £100 £1,100
Year 2: £1,000 10% £110 £1,210

However, after year two you'd earn another £100 of interest, plus another £10 of interest on that smaller sum (the £100). That’s because you’re adding – or compounding – another 10% of the original £100 interest into the total sum. So, after two years you'd have a total of £210 to repay along with the original £1,000 debt. Don’t forget, if you pay off your credit card in full each month and by the date due, then with many credit cards you can avoid paying the interest on your debt.

What else should I think about?

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 and then don’t spend 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 served going for a card offering a more competitive APR rate or another type of benefit. In order to avoid any surprises when it comes to charges, you must read the terms and conditions of your credit card with care. 

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