What Does Credit Card APR Mean?

By John Walton

  • Overview

    APR stands for annual percentage rate, which is commonly understood to mean the annual interest rate. This is true for many applications, but with credit cards it has a somewhat different meaning. This is not widely known, and can make coming up with a plan to pay down the debt on a credit card tricky.
    What Does Credit Card APR Mean?
    What Does Credit Card APR Mean?
  • APR is Misleading

    The big misunderstanding regarding credit cards is that the annual percentage rate (APR) is the actual, annual interest rate charged on the outstanding balance of the account. This is not the case. A credit card's APR is an estimate of what the interest rate is or will be in the near future. Given stable conditions, the APR is at best a partial reflection of the effective annual rate (EAR), but this is not always so. Unstable conditions can cause the APR to bear little resemblance to what the EAR will be by the end of a fiscal year.
  • The EAR

    The main differences between EAR and APR are twofold. First, EAR is not commonly recognized as a legal term, and it certainly is not recognized as such in the states where nearly all credit card companies are based (such as Delaware). Second, EAR does not include one-time changes, such as front-end or late fees. It also does not include extraordinary circumstances, such as those that may cause your interest rate to change, such as a late payment, balance transfers or special offers.


  • How the Interest Rate is Set

    The major factor in setting a credit card's interest rate is the interest rate charged by the Federal Reserve, the issuer's projections on future inflation and the issuer's evaluation of a customer's credit worthiness. Low interest rates, stable inflation and good credit history can result in a low interest rate on a credit card. For example, many Americans enjoyed rates between 9 to 12 percent in the late 1990's, a reflection of the economic conditions of the time. The same Americans are now likely receiving rates of 15 to 19 percent on their credit cards, due largely to future projections for higher interest rates and greater inflation.
  • Considerations

    The split between EAR and APR can lead to complications in planning repayment of a credit card balance. For example, assuming a stable balance and all other conditions remaining the same, an APR of 12.99 percent over the course of a year's worth of compound interest is the same as an EAR of 13.79 percent. The math involved in determining these figures is complicated. The result is that planning to pay down credit card debts by regular installments is often faulty. In the case of a large balance, the difference of 1.5 percent can still add up to hundreds of dollars per year.
  • Benefits

    Credit cards offer consumers a handy line of credit. Despite the interest rates, which are always higher than those involved in personal loans from a bank, credit cards can provide a useful tool for individuals or families seeking to make ends meet when faced with short-term financial difficulties. That is especially the case in the United States, with its very low rate of personal saving.
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