The Truth About Credit Card Interest Rates and APR
Guest Author
Understanding how credit card interest works is crucial for making informed borrowing decisions and avoiding costly mistakes. The Annual Percentage Rate (APR) represents the yearly cost of borrowing, but the way interest is calculated and applied can be more complex than many cardholders realize.
Most credit cards use variable APRs tied to the Prime Rate, which fluctuates with Federal Reserve policy. When the Fed raises or lowers rates, your credit card APR typically follows within one to two billing cycles. This connection means that interest rates on credit cards tend to rise during periods of economic tightening.
Credit card companies typically offer a range of APRs based on your creditworthiness. The advertised rate might show "13.99% - 24.99% Variable APR," with better credit scores qualifying for lower rates within this range. Your specific rate is usually disclosed after approval, though some premium cards publish their exact rates.
The daily periodic rate determines how much interest you're charged each day you carry a balance. This rate is calculated by dividing your APR by 365 days. For example, a 20% APR equals a daily rate of about 0.055%. Interest is typically calculated on your average daily balance throughout the billing cycle.
Promotional APRs can provide significant savings opportunities. Balance transfer offers might provide 0% APR for 12-21 months, while purchase promotions offer 0% APR on new purchases. Understanding the promotional period length and the rate after the promotion ends is crucial for planning your payoff strategy.
Grace periods typically provide 20-25 days of interest-free borrowing for new purchases, but only if you pay your full balance each month. Carrying any balance usually eliminates the grace period on new purchases until you pay the balance in full again.