Annual percentage rate

What is an APR?

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Read our guide to find out what the difference is between a representative and personal APR.

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APR stands for Annual Percentage Rate. The APR calculation takes into account the interest rate on a credit card (or other borrowing) and any other charges such as an annual fee or arrangement fee. APRs are used to compare different credit card offers and make the process of finding the right card a little less complicated.

The APR and the interest rate

When you take out a credit card you’ll be told the interest rate you’ll pay. This is the cost of borrowing money. For example, if you borrowed £100 and the interest rate was 5% a year, you’d need to repay £105 to clear the debt.

Credit card interest rates range from about 6% to 50%; the average card charges about 18 or 19%. Credit cards with high interest rates are typically aimed at people with a poor credit history.

Interest rates are usually quoted annually, but not always. Payday lenders, for example, sometimes quote monthly interest rates.

A credit card’s APR will be higher than its interest rate if the card comes with an annual fee.

All this might sound confusing but APRs are useful as they make it easier to compare different credit card offers. APRs are also used to compare mortgages and loans, both of which are likely to have fees attached.

The advertised APR and the rate you’ll pay

There are two types of APR you’ll hear about regarding credit cards:

  • The representative (or typical or advertised) APR
  • Your personal APR

The representative APR

Credit card providers are required to display a "representative” APR when they advertise a credit card offer. In theory, 51% of people who are accepted for the credit card should be offered the representative APR. If you're not given the advertised rate, you'll receive a personal APR. This will probably be higher than the representative APR.

Lenders are required to show representative examples of credit card deals on their financial promotions (adverts), in order to obey industry rules and regulations. A representative example takes into account the annual rate of interest you'll have to pay on everyday spending, together with any extra fees such as the annual fee.

When you see a representative example, it will be calculated using an assumed credit amount of £1,200.

This doesn't mean you’ll necessarily be offered a credit limit of £1,200 or the interest rate shown, but it helps you assess how much your borrowing might cost.

The representative APR shown on adverts will always refer to the credit card’s purchase rate. This is the interest rate you’ll pay when you buy things with the card. Other rates may apply for balance transfers, money transfers or cash withdrawals.

Your personal APR

Your personal APR is the rate you’re offered by a credit card company on receipt of your application. It may or may not be the same as the representative APR and will be influenced by your credit score and personal circumstances.

Your credit score depends on how you have handled credit in the past. You’ll have a good credit history if you have always repaid debts on time and haven’t exceeded your credit card or overdraft limit.

How you manage your household bills also affects your credit score – energy and telecoms companies can leave markers on your credit report if you have paid bills late or not paid them at all. These defaults will stay on your credit record for six years. Serious debt issues such as county court judgments (CCJs) or bankruptcy will also show on your credit report.

Other factors affecting your credit file include your age; whether you’ve ever had a credit agreement before; whether you own your home; your employment status; and if you are listed on the electoral roll. If you have joint credit agreements with someone else – for example, a joint mortgage with your partner – their credit history will affect yours.

In general, if you have a good credit history you’ll pay less interest when you borrow money, and if you have a poor credit history you’ll pay more interest.

APRs and 0% credit cards

When you compare credit cards, you’ll notice some have promotional offers. Typically, this will involve offering 0% interest on either purchases or balance transfers for a set period of time.

For example, you might see an offer for “0% interest on balance transfers for 12 months” or “0% interest on purchases for six months”.

If you choose an offer that gives you 0% interest on purchases, it means that for the period stated you won't have to pay interest if you use the card for spending. The card will still have an APR which will be calculated using the interest rate the card reverts to at the end of the 0% period.

If you have a credit card with a 0% promotional offer, make sure you pay at least the minimum repayment each month. The minimum repayment will be printed on your statement and will usually be a percentage of the outstanding debt or a cash amount.

Missing a minimum payment can mean any 0% introductory deal is cancelled – and interest will kick in. You might incur a late payment fee too, normally £12, and it could affect your credit record.

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