What is Annual Percentage Rate (APR)?
An Annual Percentage Rate or APR is calculated by taking into account the interest rate on a credit card (or another borrowed sum) and any other charges such as an annual fee or arrangement fee.
APRs are used to compare credit card offers, making the process of finding the right card a little less complicated. But what is the difference between an interest rate and an APR?
APR and interest rate
When you take out a credit card you’ll be told the interest rate you’ll pay. This is the cost to you for borrowing money. For example, if you borrowed £100 and the interest rate was 10% a year, you’d need to repay £110 to clear the debt.
Credit card interest rates range between 0% and 50%, but the average credit card charges about 18% or 19%. Credit cards with higher interest rates are typically aimed those with a poor credit history, or those without a credit score, such as younger people.
Usually, interest rates are quoted annually, but not always. Payday lenders, for example, sometimes quote monthly interest rates because they are often exorbitant.
The only difference between an interest rate and an APR is that the annual fee for the card, or arrangement fee, is added on. Therefore 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 made useful when comparing different credit card offers – because it will tell you the overall interest rate, rather than you being surprised by fees afterwards. APRs are also used to compare mortgages and loans, both of which are likely to have fees attached, so you know what to expect to pay.
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, only 51% of people who are accepted for the credit card will be offered the representative APR.
If you're not offered the advertised rate, you'll receive a personal APR. This will probably be higher than the representative APR, because it’s based on your credit score.
Lenders are obligated to show representative examples of credit card deals on their financial promotions and advertising, 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. However, this doesn't necessarily mean you’ll be offered a credit limit of £1,200, or the interest rate shown, but it helps you figure out how much your financing might cost per year.
It’s worth noting the representative APR shown on adverts or promotions will always refer to the credit card’s purchase rate, which 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 – but you should always avoid using a credit card for cash. You’ll see these different rates clearly when you compare credit cards, as we list all this detail and much more for every card you’ll see in your results page.
A personal APR
A personal APR is the rate you’re offered by a credit card company after you have applied for a card. It might be the same as the representative APR but isn’t always: a personal APR is influenced by your credit score and personal circumstances, such as salary and household spend.
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 will also affect your credit score – energy and telecoms companies, for instance, can leave markers on your credit report if you pay late or fail to pay bills. 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
- Previous credit agreements
- Home ownership
- Your employment status
- If you are listed on the electoral roll
- If you have joint credit agreements – their credit history will affect yours.
Generally speaking, if you have a good credit history you should pay less interest when you borrow money, and if you have a poor credit history you’ll probably pay more interest.
APRs and 0% credit cards
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 that 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. If you miss a minimum payment, you could lose any 0% introductory deal – and interest will kick in. You might incur a late payment fee too, normally £12, and it could affect your credit record.