APR on credit cards explained

A credit card's annual percentage rate tells you what the credit facility will cost over a year. It covers both the interest on your borrowing and any standard annual or application fees.

The different types of APR#

Representative APR#

Providers usually put the word representative in front of their advertised rate. A card's representative APR is the rate offered to the majority — at least 51% — of a lender's customers.

It's a useful comparison tool, whatever kind of card you're after, letting you estimate the cost of borrowing across cards over a year and weigh up different options.

Crucially, it may not be the rate offered to you. Your personal circumstances determine your individual APR, which could be lower or higher. You'll only know once the lender has assessed your application.

Personal APR#

Rates differ widely between cards and lenders, and the one you're offered is based on your credit report, borrowing history and how much you want to borrow.

If lenders are confident in your credit score, expect a better, lower APR — sometimes even 0% for an introductory period.

Those with an adverse credit history are usually offered higher APRs and lower limits, which minimises the lender's risk and covers potential losses. Keep paying on time and in full, though, and you gradually build positive history and better odds of a favourable rate.

The five APRs on a single card#

The personal APR you're offered is usually what you'll pay on purchases. But it shifts depending on how you use the card:

• Purchase APR — charged on purchases. Some lenders offer a grace period between the end of a billing cycle and the payment date, so paying in full and on time each month can avoid it entirely.
• Balance Transfer APR — charged on balances moved between cards, often to take advantage of a lower rate.
• Introductory APR — often low or 0%, for a promotional period typically 6 to 21 months. Once it ends, the standard rate applies.
• Cash Advance APR — charged when you use your card to get cash. Typically higher than other APRs, and charged immediately from the transaction date until repaid.
• Penalty APR — charged when you miss a payment by 60 days or more. It stays in place for a minimum of six months and is the highest rate your card can charge.

How APR is calculated#

For consistency, every representative APR is calculated on an assumed credit limit of £1,200 over a year, so you can reliably compare products.

APR and interest rate aren't the same thing. A card's APR is typically higher, because it includes annual, monthly or application fees on top of the interest.

Two cards make the point:

Same purchase rate, very different cost. APR gives the more complete picture.

Working out exactly what you'll pay is still tricky, though. APR doesn't include interest or fees from compound interest, late payments or cash transfers, and it doesn't account for you repaying more in one month than the next. As your balance fluctuates, so do your repayments.

The most important thing to hold onto: you only pay APR if you carry an outstanding debt. Clear your card every month and you pay no APR at all.

Don't clear it and interest is charged at the stated APR. Pay only the minimum month after month and you eventually pay interest on interest — compound interest — which extends how long the balance takes to clear and increases the total cost.

Fixed vs variable APR#

A fixed APR doesn't change over the borrowing term, making repayments predictable.

A variable APR moves with the Bank of England base rate (opens external site), which reflects economic conditions and affects what it costs banks to lend. If the base rate rises, so does your APR.

Breaching your card's terms — missing payments, or paying late — can also push your APR up for a period. Staying on top of your terms, balances and lender communications is how you avoid that.

Additional fees to consider#

APR is the starting point, not the whole cost. Cash withdrawals, late payments and going over your limit can all add charges.

Read the terms and conditions carefully, because specifics matter. An introductory 0% on purchases may not apply to ATM withdrawals, for instance.

Transfer and transaction fees. You may pay a percentage of the transfer amount on balance or money transfers, over and above your APR. Cash transactions — ATM withdrawals, paying fines, buying foreign currency — can carry a percentage fee too.

If interest is compounding, it's worth looking at cards offering low or 0% rates. Transfer fees are often lower than the interest you'd otherwise pay. Whatever you decide should suit your circumstances, and for specific advice, speak to a financial adviser.

Late fees. Late or incomplete minimum payments can incur a fee and cost you any promotional offers on the account. Even with a 0% introductory offer, you still need to make the minimum repayment every month — usually a percentage of your outstanding debt, listed on your statement.

Missed payments also leave negative payment markers on your credit report. These stay for up to six years and make credit harder to access.

All of these count towards your credit limit. People think of exceeding a limit in terms of purchases, but transactions, interest, fees and charges all push you towards it too.

And while a 0% introductory offer is appealing, remember the issuer may apply higher rates later. Factor in the long term before signing up.

How applications affect the APR you're offered#

Since the advertised rate isn't necessarily yours, you might be tempted to apply to several cards hunting for the lowest. Consider the implications first.

Every application leaves a hard check on your report, approved or denied. Hard checks stay for up to two years, and too many in a short period hurts your score — it signals desperation for credit, which makes lending to you look risky. So too many applications can actually increase the APR you're offered.

Before applying, use an eligibility checker. These run soft checks rather than hard ones, so they don't affect your score, and they help you narrow down the cards you're most likely to be accepted for.

The key things to remember#

• Representative APR goes to at least 51% of customers — yours may differ.
• APR includes fees; the interest rate doesn't, which is why APR is usually higher.
• All representative APRs assume a £1,200 limit over a year, so comparisons are valid.
• Purchase, balance transfer, introductory, cash advance and penalty APRs can all apply to one card.
• Cash advance interest starts immediately; penalty APR kicks in after 60 days and lasts at least six months.
• Clear your balance monthly and you pay no APR at all.
• Fees, interest and transactions all count towards your credit limit.
• Use eligibility checkers — hard searches stay two years and can raise the APR you're offered.