What does APR mean on credit cards?

A credit card account’s annual percentage rate (APR) tells you how much it will cost you over the course of a year to use the credit facility. It includes both the interest on your borrowing and any standard annual or application fees.

But what does that mean for your credit card in practical terms? In this article, we explain what you need to know about annual percentage rates (APRs) on credit cards so you can get the most out of your credit.

What types of APR are there?

Aside from giving you an indication of interest and standard fees, there are also different types of APR, and not all are created equal.

Representative APR

You might have noticed that, in listing their various offerings, credit card providers often have the word ‘representative’ in front of their advertised annual percentage rate. A card's representative APR is the percentage rate usually offered to the majority (at least 51%) of a lender's customers.

Representative APR is a useful comparison tool to help you decide if a credit card is right for you, regardless of the type of card you’re looking for (e.g. you might want one with low balance transfer rates or 0% on purchases). You can use it to estimate the cost of your borrowing between cards over the course of a year and weigh the benefits of different credit options.

Crucially, though, the representative APR may not be the rate specifically offered to you. Your personal financial circumstances will determine your individualised APR. It could be lower or even higher than the advertised representative rate, but you’ll only know what you're really in for once the lender has assessed your application.

Personal APR

As you investigate your credit options, you’ll find that annual percentage rates (APRs) can differ widely between credit cards and lenders. What’s more, the APR you’re offered will be based on your credit report, borrowing history, and the amount you want to borrow.

If lenders are confident in your credit score, you can expect a better (i.e. lower) APR. In some cases, you might even be approved for a card with a 0% APR for a certain period of time.

On the other hand, those with an adverse credit history are usually offered cards with a higher APR and a lower credit limit. This minimises the lender's risk and helps cover potential losses if the borrower is unable to pay. The good news is that, as long as you continue making your payments on time and in full, you can gradually build a positive credit history, increasing your chances of being approved for cards with more favourable APRs.

Other types of APR

In most cases, the personal APR you’re offered when setting up your credit card is the rate you'll be charged on purchases such as groceries, meals out, or hotel bookings. However, your APR can also shift depending on how you use your card, so it’s worth considering what these shifts could be when deciding on the right card.

For example:

• Purchase APR is the interest rate charged on purchases you make with your card. Some lenders offer a grace period between the end of a billing cycle and when the payment comes due, before charging interest. This means if you pay your bill in full and on time every month, you might be able to avoid paying this APR.

• Balance Transfer APR is charged on any balances you transfer between credit cards, which you might do to take advantage of a lower interest rate.

• Introductory APR is the rate (often low or even 0%) you may be offered for a promotional period often between the first 6 to 21 months on a new card. Once this period is over, so is the 0% APR – at this point it will go up to the standard APR rate on that card.

• Cash Advance APR is charged when you use your credit card to get cash. Interest on these amounts is typically higher than other kinds of APR and is charged immediately from the date of the transaction until the balance is repaid.

• Penalty APR can be charged when you miss a payment by 60 days or more. It remains in place for a minimum of six months and is also the highest APR rate that you can be charged on your card.

How does APR work?

To ensure consistency across the board, every representative APR is calculated with an assumed credit limit of £1,200 over the term of a year. This allows you to reliably compare credit products between different lenders.

The terms ‘APR’ and ‘interest rate’ are often used interchangeably. However, a card's APR is typically higher than its interest rate. This is because the APR includes the card’s annual/monthly fees – or any application fee – as well as the interest charged on outstanding monies.

For example, say you're considering two cards:

• Card A, with a purchase interest rate of 18.9% and no annual fee.

• Card B, also with a purchase interest rate of 18.9% as well as an annual fee of £150.

While the purchase rates are the same, the annual fee of £150 will push the Representative APR on card B up to 31.5%, while card A’s stays the same at 18.9%.

As we can see, a credit card's APR offers a more complete picture of how much your credit card will cost you.

Working out exactly how much you’ll pay, even when you know your APR, can be tricky though. Your credit card APR doesn’t include any other interest or fees you could incur as a result of compound interest, late payments, or cash transfers. It also doesn’t account for the fact that you might pay more back in one month than the next. This means, as your balance fluctuates, so will your repayments.

One of the most important things to keep in mind about annual percentage rates is that you only pay them if you have an outstanding debt on your credit card. So, if you pay off your credit card every month, you won't need to pay any APR at all. Of course, life happens, and this may not always be possible, but it's a good practice to keep in mind.

On the other hand, if you don’t pay the card off fully, interest will be charged at the stated APR. Moreover, if you only make the minimum payments month on month, you’ll eventually end up paying interest on interest. This is called compound interest, and it can make debt especially difficult to manage by extending the time it takes to clear your balance and, therefore, increasing the cost of borrowing.

Fixed vs. variable APR

As the name suggests, a fixed APR doesn’t change over the entire borrowing term, making monthly repayments more predictable.

In contrast, a variable APR means that the interest rate you’re charged will vary according to the Bank of England's base rate. This rate is based on economic factors and impacts how much it costs banks to lend money to their clients. If you’re on a variable rate and the base rate increases, so will your APR.

What’s more, if you breach any of your credit card’s terms – by missing payments or not making them on time – your APR could go up for some time. Keeping up to date with your loan terms and balances, as well as any lender communications, can help you avoid this.

Additional fees to consider

While the APR on credit cards is an important starting point, it’s not the only fee to consider when choosing a credit card.

Cash withdrawals, late payments, and going over the credit limit can also lead to extra charges, depending on the credit card issuer. You can find out more about any additional fees by reading the terms and conditions, and it’s important to familiarise yourself with any specific conditions. For example, if there’s an introductory period of 0% interest on purchases, it may not apply to ATM withdrawals.

Some additional fees to keep in mind are:

• Transfer and transaction fees. Depending on your credit card, you might have to pay a percentage of the transfer amount in fees over your approved APR when making balance or money transfers. Similarly, you may also be charged a percentage of the transaction value for cash transactions such as ATM withdrawals, paying fines, or buying foreign currency.

If you find interest is compounding, you may want to consider looking at other cards that offer low or 0% interest rates. Transfer fees can often be lower than the interest you could have been charged, so it's always worth reviewing how much you could be paying. Whatever you decide to do must be best for your financial circumstances and for specific advice we recommend speaking with a financial advisor.

• Late fees. Late or incomplete minimum monthly payments may incur an extra fee and cause you to lose any promotional offers on that account. Even if you have a card with an introductory 0% promotional offer, you’ll still need to make the minimum repayment every month. This minimum amount is usually a percentage of your outstanding debt, and it’ll be listed on your statement each month.

On top of this, missed payments leave negative payment markers on your credit report, which negatively impact your credit score. These markers remain on your report for up to six years and can make credit harder to access in the future.

It’s also important to keep in mind that these additional fees count towards reaching your credit limit. People often think of exceeding credit limits in terms of purchases, but importantly, transactions, interest, fees and charges can also take you over your limit. So making sure you know where your balance stands can help you avoid unexpectedly hitting your limit.

While a 0% introductory offer can be appealing and helpful at first, it’s important to keep in mind that the credit card issuer may add higher interest rates in the future. So don’t forget to factor in these long-term considerations before taking up one of these offers.

APR, credit applications, and your credit report

Since the advertised representative APR isn’t necessarily the one you'll be offered, you might be tempted to send multiple applications for many cards, to try and get the lowest APR. Before you do this, though, it’s important to understand the implications.

Each credit application leaves a ‘hard check’ (or ‘hard search’) on your credit report, regardless of whether it’s approved or denied. Hard checks remain on your report for up to two years, and having too many in a short period can negatively affect your credit score. This is because it can signal to lenders that you're desperate for credit, making them perceive lending to you as risky. As a result, too many credit applications might increase the APR you’re offered.

So, it’s helpful to monitor your credit report over time to make sure your information is correct and that you’re aware of the factors on your report that may impact an application. At Checkmyfile, we break down up to six years of credit history into one simple-to-use, independent and highly confidential review. Here, you can understand your habits, pinpoint patterns and spot any errors that could be impacting your overall credit health — without affecting your score. Get started now

Before you apply for credit, it’s helpful to use an eligibility checker to get an idea of your likelihood of being approved. Unlike a formal credit application, these tools run ‘soft checks’ (or soft searches) instead of hard checks, which don’t impact your credit score. Using these eligibility checkers can help you narrow down the cards you’re most likely to be accepted for, so you can prioritise which to apply for based on your specific circumstances.

Getting the best out of your credit card and APR

Credit cards can help you manage your money and ease the burden of large payments by spreading them over a longer time period, but understanding all aspects of your credit card is imperative to making it work well for you.

When choosing between credit cards and comparing APRs, it’s important to remember that the advertised APR may not be the one you’re offered. To get the best deal possible, it’s important to keep your credit report in good shape. It’s also helpful to use an eligibility checker beforehand to help you work out where you’re most likely to be approved.

Responsibly managing your credit is the most important consideration—because careful management not only helps you avoid extra costs but also improves your credit report and score.