- 1 What is APR? How does APR differ from standard interest rates?
- 2 What is a good APR for a credit card?
- 3 What is APR: A Breakdown of Annual Percentage Rates
- 4 8 Best Low APR Interest Credit Cards – Reviews & Comparison
- 5 What Exactly Is Credit Card APR? And Does It Really Matter?
What is APR? How does APR differ from standard interest rates?
Article Category: Finance |
In an ideal world, taking a loan would be simple. Apart from filling out the paperwork and receiving approval all you'd need to know is the amount of interest you have to pay. Take out $1,000 at 5% and your total repayment sum comes to $1,050. But, depending on the terms of your finance, on top of this you'll need to consider any additional costs such as processing fees, etc.
Simple, right? In theory, yes. The confusion starts to set in once you factor in APR (Annual Percentage Rate).
Before we move on to look at the specifics of APR, let's start with some very basic explanations.
What exactly is an interest rate?
An interest rate is a fee, calculated as a percentage of the total loan amount, that you are charged for borrowing money. Most lenders refer to this as a base rate.
We've already delved into the question, what is compound interest and how can it help you?. But to save you having to jump back and forth between pages, here's a quick explanation:
When you take out a loan the lender calculates interest on a sliding scale. This figure is then used to work out what your monthly repayments will be.
You borrow $1,000 with an APR of 3% over 3 years (assuming an annual APR calculation).
Year 1 interest: 1,000 x 0.03 = 30 and 30 + 1,000 = 1,030
Year 2 interest: 1,030 x 0.03 = 30.9 and 30.9 + 1,030 = 1061
Year 3 interest: 1,061 x 0.03 = 31.83 and 31.83 + 1,061 = 1,092.83
In total, you'll pay back $1,092.83 at the end of the finance period.
Note: advertised APR figures are normally higher than the advertised interest rate because lenders bundle additional costs and fees into the rate shown. For peace of mind, and to ensure you know what you're going to pay, ask your lender exactly what fees are included in the APR figure they offer you.
So, what is the difference between interest rate and APR?
We've touched on it very briefly already, but let's go a little deeper. When you accept any kind of loan offer you should be shown two interest rates: the APR and the flat rate of interest.
The yearly interest rate you see is exactly what it says: it's only the charge (in the form on interest) that you pay for borrowing money. There are no grey areas here - if the figure is 10% then that's the base rate you'll be charged. So, if you're lucky enough to find a lender who charges you only $45 for borrowing $1,000 then the rate you pay is 4.5% (45/1000).
As we noted earlier, the way APR is calculated is a little more complex as it combines a number of additional fees charged by your lender. Included in the cost are prepaid interest, insurance, closing fees and any other costs that may be associated with the transaction. Combined, these factors mean the APR you're shown is higher than the base rate that lenders use to advertise their loan plans.
Another factor to consider is the cost of moving loans from one supplier to another. APR is worked out on a sliding scale and your lender shows you figures based on the assumption that your debt will be held by them until it's finally paid off. If at some point you decide to shift your debt to another company then we strongly advise you check the sums. Although those lower interest rates look very appealing, if you keep jumping from one supplier to another, you might end up paying far more over the term.
As with any form of lending, it's important to understand the terminology that money lenders wrap around their offers. But, even more important, having a reliable tool you can use to work out the financial impact of borrowing money will stand you in excellent stead before you even start the application process that's why we've created an interest rate calculator to give you an accurate view of both the interest and APR payments you'll be required to meet. If you would like to learn more about the different types of interest rate, read our article, what is the difference between nominal, effective and APR interest rates?
Written by James Redden
Please rate this article using the star rater below. If there is anything missing from the article, or any information you would like to see included, please contact me.
What is a good APR for a credit card?
As of December 2014, a good APR rate for a credit card is typically 11.04 percent or lower, according to Bankrate. The APR is the annual percentage rate of interest charged to a credit card holder on balances remaining after the credit card's due date.
Are there legitimate credit cards that offer 0 percent APR?
What are some considerations to keep in mind when applying for a credit card?
What are the benefits of the Simplicity credit card?
The average APR rate for cards with cash back allowances is around 16 percent, and balance transfer APR rates range from 15 percent to 0 percent as of 2014, according to Bankrate. While many credit card companies offer consumers lower rates, such as 2.9 percent on balances transferred or 4.9 percent introductory offers, Bankrate warns that consumers should read the terms carefully. Many promotional APR rates expire after a determined amount of time, and consumers may have to pay a higher interest rate on the remaining balance.
What is APR: A Breakdown of Annual Percentage Rates
If you have spent anytime researching credit cards you have come across the acronym A.P.R. but what is it and why should you concern yourself with it? A.P.R. stands for A nnual P ercentage R ate. APR varies from business to business but it is the rate of interest, on a yearly basis, that is applied to the balance carried on a credit account. The Truth in Lending Act established by the federal government, requires all creditors to disclose the APR on credit and loan agreements. When comparing creditors and programs you should see their terms & agreement for the specifics of their APR stipulations.
When you have been approved for a credit card and begin using it, you will start to receive billing statements. The credit card billing statements you’ll receive in the mail or if you go ‘green’ and you elect for online statements, will outline the finance charge (interest) as a monthly or daily periodic rate. It will also offer the interest as the APR on the balance.
For example, if your APR is 12% you may see a calculation such as:
This percentage is you monthly periodic rate and determines the cost of credit for any given month*. To determine the daily periodic rate, you can use 365 in place of the 12 in the calculation above. If you have a balance of $500 dollars, the cost of credit can using the monthly periodic rate, would be expressed as:
$500 (Average Daily Balance) x 1.0% (Monthly Periodic Rate) = $5 (Monthly Charge)
*Some cards use a daily periodic rate to calculate the finance charge.
As you compare different credit cards and associated offers, it is wise to compare the APR, as it has the greatest impact on the cost of a credit card. Nevertheless, there may be other items to compare when determining the right card for you or your business. Every situation is different, every card is unique, and if you are working to repair your credit you may be considered a high risk borrower and subject to additional charges, restrictions, or promotional specials. In short, the method for determining your balance can make a big difference in how much interest you pay and will vary from creditor to creditor.
8 Best Low APR Interest Credit Cards – Reviews & Comparison
Generally, it’s wise to avoid carrying balances on your credit cards. Credit card balances quickly rack up interest charges, eating into your monthly personal budget and hampering your ability to save and invest. Over time, unpaid credit card balances could compel you to enroll in credit counseling, or even cause you to declare bankruptcy.
However, it’s sometimes impossible to avoid carrying credit card balances. For instance, if your car breaks down and you have no other way to get to work, charging the repair to your credit card is better than losing your job – even if you know it’ll take some time to pay off the balance.
Low APR credit cards make it easier to carry balances from month to month because they don’t accrue interest as rapidly, and their carried balances grow more slowly as a result. If you habitually carry balances from month to month, or want to do so in the future without paying through the nose, consider these low APR credit card options.
Best Low Interest Credit Cards
Long Introductory APR Period; Free Monthly Credit Score; No Penalty APR
The information related to the Chase Slate credit card has been collected by MoneyCrashers and has not been reviewed or provided by the issuer of this card.
Chase Slate® has a nice 0% introductory APR period for balance transfers and purchases. While the period isn’t quite as long as Chase’s Citi peers, this is still a great card for transferring high-interest balances. In fact, Slate® won CardRatings.com’s “Best Balance Transfer” award five years in a row – from 2012 to 2016, due to the fact that it waives balance transfer fees during the first 60 days of card membership.
Another Chase Slate® perk: no penalty APR. On the other hand, purchase, balance transfer, and cash advance APRs are on the high side of the low APR category. Fees are on the high side too.
- Sign-up Bonus. There’s no sign-up bonus.
- Introductory APR. 0% on purchases and balance transfers for 15 months.
- APR. After the introductory period, the variable APR ranges from 15.74% to 24.49%, depending on your creditworthiness and prevailing rates. Cash advance APR is 25.74%, also variable. There’s no penalty APR.
- Fees. There’s no annual fee. After a 60-day fee-free period, balance transfers cost the greater of $5 or 5% of the transferred amount. Cash advances cost the greater of $10 or 5%.
- Other Perks. Card membership comes with a free monthly FICO score.
Low Regular APR; No Fees of Any Kind
The PenFed Promise Card boasts a low regular APR and no fees of any kind – no late fees, annual fees, balance transfer fees, or cash advance fees. Although there’s no introductory purchase APR, there’s a low introductory balance transfer rate. And there’s no penalty APR, so you don’t have to worry about what might happen if you make a late payment. However, the lack of an introductory purchase APR is a significant drawback.
- Sign-up Bonus. When you spend at least $1,500 in your first 90 days of card membership, you get a $100 statement credit.
- Introductory APR. There’s no regular introductory APR. The introductory balance transfer APR is 4.99% for 12 months.
- APR. Purchase, balance transfer, and cash advance APR is a variable 9.24% to 17.99%, depending on your creditworthiness and prevailing interest rates.
- Fees. There aren’t any fees, period.
- Other Perks. The PenFed Promise Visa Card is one of the few low APR credit cards with a sign-up bonus.
See our PenFed Promise Card Review for more information. Find out how you can apply for this card here.
Solid Intro APR Period and No Penalty APR; Great Cash Back Rewards
Although it doesn’t have the lowest APR around, Discover it does have a nice cash back rewards program. All purchases earn 1% cash back, with no spending caps or restrictions. Purchases in quarterly rotating spending categories (such as department store or gas station purchases) earn 5% cash back, up to a $1,500 quarterly limit across all active categories. Quarters begin January 1st, April 1st, July 1st, and October 1st.
You can redeem your cash in any amount as a statement credit, bank account deposit, check, or Amazon.com purchase credit. Plus, Discover doubles all cash back earned in the first year of card membership.
In addition to the cash back rewards program, the main perks of the Discover it card include a solid 0% introductory APR period, no penalty APR, no annual fee, and a free FICO credit score with card membership. Drawbacks include costly cash advances.
- Sign-up Bonus. Aside from the double cash back offer in your first year, there’s no sign-up bonus.
- Introductory APR. 0% purchase and balance transfer APR for 14 months.
- APR. After the introductory APR period ends, purchase and balance transfer APR is 11.74% to 23.74%, depending on your creditworthiness and prevailing interest rates. There’s no penalty APR.
- Key Fees. There’s no annual fee or foreign transaction fees. Balance transfers cost a flat 3% of the total amount transferred. The cash advance fee is the greater of $10 or 5% of the advanced amount, plus a 25.74% APR.
- Other Perks. Discover’s Freeze It feature lets you turn off many account features, including the ability to make new purchases and cash advances, at the click of a button. The Discover it card also comes with a free FICO credit score. Also, at the end of your first year as a cardholder, Discover automatically doubles all the cash back you earned over the previous 12 months.
See our Discover it Card Review for more information. Find out how you can apply for this card here.
Solid Introductory Rate; Low Fees; Cash Back Rewards
Discover it Chrome has an even lower purchase and balance transfer APR than the regular Discover it card, plus minimal fees and a nice 0% introductory APR period. One drawback is the penalty APR, which can range to nearly 30%.
Like the regular Discover it card, Discover it Chrome has a nice cash back rewards program that benefits cardholders who pay their balances in full each cycle. Dining and gas purchases earn 2% cash back, up to $1,000 per quarter, and an unlimited 1% after reaching the spending cap. All other purchases also earn an unlimited 1%. You can redeem your cash back in any amount, and Discover automatically doubles all cash back earned in the first year.
- Sign-up Bonus. There’s no sign-up bonus, aside from the first-year double cash back deal.
- Introductory APR. 0% purchase and balance transfer APR for 14 months.
- APR. After the introductory period, purchase and balance transfer APR ranges between 11.74% and 23.74%, depending on creditworthiness and prevailing interest rates. Penalty APR ranges up to 29.99%.
- Key Fees. There’s no annual fee or foreign transaction fees. Balance transfers cost 3% of the transferred amount.
- Other Perks. There’s no late fee on your first late payment. This card also comes with the Freeze It feature and free FICO credit score. As with the flagship Discover it, Discover it Chrome automatically doubles all the cash back you earn during your first year.
See our Discover it Chrome Card Review for more information. Find out how you can apply for this card here.
Very Low APR; Minimal Fees
The Barclaycard Ring™ Mastercard® is not your typical credit card – and that’s generally a good thing. Dubbed “the first social credit card,” it’s built around an active user community that shares financial tips and advice among members. All Ring cardholders earn automatic entry into the Giveback program, a profit-sharing arrangement in which all Ring cardholders receive a portion of Barclaycard’s profit based on their level of activity in the Ring community and the number of new cardholders they successfully refer. You can donate your Giveback earnings to the charity of your choice, take them as cash, or apply them as a statement credit.
Additionally, Ring has a low purchase, balance transfer, and cash advance APR. There’s a long 0% introductory APR period, and fees are minimal too.
- Sign-up Bonus. There’s no sign-up bonus.
- Introductory APR. There is a 0% introductory APR for 15 months.
- APR. Purchase, balance transfer, and cash advance APR is 13.74% for all cardholders, though it may vary over time as prevailing interest rates change.
- Fees. There’s no annual fee, balance transfer fees, or foreign transaction fees. Cash advances cost a flat $3, regardless of size. Late and returned payments cost $27.
- Other Perks. You get complementary access to your FICO score in real time.
Very Long Introductory APR; No Late Fees; VIP Perks
The Citi Diamond Preferred Card has the same great introductory APR period as the Citi Simplicity Card, plus a slightly better regular APR for purchases and balance transfers. However, there is a penalty APR, and fees are a bit higher. One of the biggest benefits of the Citi Diamond Preferred Card is its slew of VIP perks, including exclusive deals at major retailers and personalized concierge service for travel and event booking.
- Sign-up Bonus. There’s no sign-up bonus.
- Introductory APR. 0% on purchases and balance transfers for 21 months.
- APR. After the introductory period, the variable purchase and balance transfer APR ranges from 13.49% to 23.49%, depending on your creditworthiness and prevailing rates. Cash advance APR is 26.24%, also variable. Penalty APR ranges up to 29.99%.
- Fees. There’s no annual fee. Balance transfers cost the greater of $5 or 3% of the transferred amount. Cash advances cost the greater of $10 or 5%. Foreign transactions run 3% of the total amount. Returned and late payments cost $35.
- Other Perks. You get free, 24/7 access to personal concierges authorized to book hotel rooms, flights, concert tickets, and other engagements on your behalf. Through Citi Easy Deals, you’re privy to exclusive discounts and deals at well-known retailers, such as CVS and Gap.
No Late Fees or Penalty APR; Very Long Introductory APR
With a super-long 0% introductory APR for purchases and balance transfers, Citi Simplicity Card is great for transferring high-interest balances from other credit cards. Fees are reasonable here as well – there’s no annual fee or late payment fee. And there’s no penalty APR. On the other hand, the regular purchase and balance transfer APR is on the high side, and cash advances are a bit pricey.
- Sign-up Bonus. There’s no sign-up bonus.
- Introductory APR. 0% purchase and balance transfer APR for 21 months.
- APR. After the introductory period, the variable purchase and balance transfer APR is 14.49% to 24.49%, depending on your creditworthiness and prevailing interest rates. The cash advance APR is also 14.49% to 24.49%, with no introductory period. Notably, there’s no penalty APR.
- Fees. There’s no annual fee or late fee. Balance transfers cost the greater of $5 or 3% of the transferred amount. Cash advances cost the greater of $10 or 5%. Foreign transactions run 3% of the total amount. Returned payments cost $35.
- Other Perks. Customer service is well above average. When you call in for phone support, you can say “representative9rdquo; at any time to skip the annoying automated menu. Also, the Citi Price Rewind feature can reduce the cost of certain purchases. After you make a purchase, Citi automatically searches for lower prices at competing retailers. If it finds a lower price within 60 days, you receive a refund for the difference, up to $300 per item and $1,200 per year.
No Annual Fee; Flexible Rewards
The BBVA Compass Visa Signature card is a low APR/rewards hybrid. It has an attractive introductory balance transfer period and a shorter, but still nice, introductory purchase APR period. The regular APR can be as low as 9.49% for folks with excellent credit, lower than many competing cards. The lack of a penalty APR is a nice perk for cardholders who occasionally miss payments. The account opening bonus is a good deal too. However, fees are often on the high side.
The BBVA Compass Visa Signature card comes with a solid rewards program that pays one CompassPoint per $1 spend, with no spending caps or rotating categories. CompassPoints are redeemable for airfare, hotel purchases, gift cards, charitable donations, and more. Their value ranges on either side of $0.01/point, depending on how they’re redeemed.
- Sign-up Bonus. There is currently no sign-up bonus for this card.
- Introductory APR. 0% on purchases for 6 months and 0% to 3.99% on balance transfers for 12 months, depending on your creditworthiness.
- APR. After the introductory periods, the variable purchase and balance transfer APR ranges from 11.99% to 29.99%, depending on creditworthiness and prevailing rates. The cash advance APR is 22.99% to 29.99%. There’s no penalty APR.
- Key Fees. There’s no annual fee. Cash advances and balance transfers cost the greater of $10 or 4%. Foreign transactions run 3%. Late payments cost $38, while returned payments run $27.
- Other Perks. Cardholders get personalized concierge service when booking entertainment and travel, similar to Citi’s VIP program.
Find out how you can apply for this card here.
Most of the cards on this list have variable APRs that fall within a fairly wide range. When you open a new card account, the issuer assigns your APR at a point within that range, based on your creditworthiness and prevailing interest rates at the time. If you have an excellent credit score and unblemished credit history, your rate is likely to be at the lower end of the range. If your credit isn’t stellar, expect a higher rate. As time goes on, your variable APR rises or falls in response to fluctuations in prevailing interest rates and changes in your creditworthiness.
That said, the low-APR credit card scene demonstrates that life really is full of compromises and trade-offs. In exchange for low interest rates and, in many cases, minimal fees, these credit cards dial back the rewards. Most don’t have any credit card rewards at all, though a few – notably Discover it and Discover it Chrome – break the mold.
If you prefer credit cards that actually pay you to spend money, check out our cash back and travel rewards credit card lists. Just remember, rewards credit cards are most effective when you pay off your balance in full each month. Carrying a balance for more than a month or two can completely offset the value of your rewards, and could actually end up costing you money.
What’s your favorite low APR credit card?
Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
What Exactly Is Credit Card APR? And Does It Really Matter?
If you’ve ever shopped around for a credit card, then you’ve probably seen promotional APR offers. These tend to say things like “0% introductory APR!” and “no interest for the first 12 months!”
But how exactly does an APR work, and is it actually important when choosing a credit card? Well, the answer might surprise you. Here’s everything you need to know about credit card APR.
APR stands for annual percentage rate. It essentially describes how much interest you’ll pay on outstanding balances.
As of a few years ago the national average credit card APR is 15.07%. So if you have a 15.00% APR, then you can expect to pay interest valued at 15 percent of your unpaid debt over the course of a year.
Sounds simple, right?
Well, that’s not quite the whole story. An APR gives us a general sense of our yearly interest rate. But with credit cards, we don’t pay interest on a yearly basis.
Instead, credit card interest is calculated every day with a daily periodic rate. To calculate most daily periodic rates, you divide the APR by 360 or 365, depending on the credit card issuer.
Therefore, using the above example, a credit card with a 15.00% APR that’s divided by 365 has a daily periodic rate of 0.041%.
This daily accumulating interest will stick to any unpaid balance at the end of the month. And since interest is calculated every day, the longer you wait to pay off your credit card debt, the more interest you’ll end up paying.
So does your APR stay fixed, or can it change from year to year? Well, that all depends on whether you have a fixed APR or a variable APR.
How to compare fixed vs. variable APR
As the terms suggest, variable APRs can fluctuate while fixed APRs tend to stay the same. Each credit card company calculates its own annual percentage rate.
To determine a variable APR, a card issuer adds its margin to a reference rate, like the U.S. Prime Rate. As of December 2016, the U.S. prime rate was 3.75%.
When the prime rate changes, variable APRs change with it. Therefore, credit card companies update variable APRs on a monthly or quarterly basis.
A fixed APR, on the other hand, doesn’t rely on the U.S. prime rate. It’s more stable, though companies can make changes from time to time. They just have to tell you first.
One credit card can have several APRs
Not only are there two types of APRs, there can also be several different APRs attached to a single credit card.
If you’ve used a credit card before, you know you can do more with it than make purchases. You can also get a cash advance or make a balance transfer.
Most credit cards have different APRs for each type of transaction. They may also have a promotional APR, like a 0% balance transfer offer that lasts for several months after opening.
A credit card could have a penalty APR as well. A penalty APR charges extra if you violate the terms of the credit card agreement.
To gain a clearer sense of all these interest rates, let’s take a look at the Chase Freedom Unlimited card. Here are its three main APRs as of this article’s publication, all of which are variable.
- Purchase APR: 0% Intro APR for the first 15 billing cycles that your account is open. After that, it’s 14.49% to 23.49%, based on your creditworthiness. This APR will vary with the market based on the Prime Rate.
- Balance Transfer APR: 0% Intro APR for the first 15 billing cycles that your account is open. After that, 14.49% to 23.49%, based on your creditworthiness. Again, these APRs will vary with the market based on the Prime Rate.
- Cash Advance APR: 25.49%. This APR will vary with the market based on the Prime Rate, too.
Where do these APRs come from? Chase explains: “We add 10.74% to 19.74% to the Prime Rate to determine the Purchase/Balance Transfer APR. We add 21.74% to the Prime Rate to determine the Cash Advance APR.”
For more details on the Chase Freedom card or to browse other credit cards offers, check out the Student Loan Hero Marketplace. You’ll see that the marketplace credit cards, like Chase Freedom, give a range of rates “based on your creditworthiness.”
Why your APR depends on your creditworthiness
You and your friend may both have a Chase Unlimited Freedom card, but you could have two different APRs. Why is that the case?
Issuers offer you a credit card APR based on your “creditworthiness.” Therefore, when you apply, they take a hard look at your credit score.
As you may know, your credit score is based on a number of factors, including your repayment and credit history. The stronger your credit score is, the lower your APR will be. If you have a weak credit score, then you’ll get slapped with a high APR.
Does credit card APR really matter?
While it’s great to understand all these terms before committing to a credit card, how important is credit card APR? Should it really determine what credit card you choose?
Here’s the thing about credit cards — even a relatively low APR is pretty high. Credit card interest rates are so heavy, you want to do everything you can to avoid credit card debt.
A good rule of thumb is this: don’t spend more than you can pay off every month.
If you follow this rule, then you’ll never have to deal with worrying about an APR. You’ll pay off your purchases in full, so interest becomes a non-issue.
Then, instead of worrying about the APR, you can look at other parts of a credit car offer. For instance, you could choose a credit card based on rewards like cash back or travel points.
That being said, promotional periods of 0% APR can be useful if you need to make a big purchase and pay it back in installments. I bought a Macbook Air during a promotional period, and I was able to pay it back over several months without incurring any interest.
The bottom line is if you’re using a credit card, you shouldn’t carry a balance over from month to month. Then, you don’t have to worry about APR at all.
In effect, your APR will always stay at 0%, right where you want it.