Finding a good APR for a credit card requires more research than comparing advertised interest rates. Comparisons based on the card holder’s credit score, learning how much interest will be charged on various aspects of the account and the workings of variable versus nonvariable rates can reveal the best APR for customers' specific circumstances.
Annual Percentage Rate
The annual percentage rate on a credit card is the interest that is charged by the issuer on the unpaid balance on the account each month. There are several different APRs that may be charged on a single credit card, even within the same billing cycle. For example, a credit card may have one APR for a balance transferred from another account, another APR for purchases and a higher rate for cash advances. To calculate the interest that will be charged on a monthly basis, each APR is divided by 365 and then multiplied by the number of days in the billing cycle.
A reference rate is a benchmark that the card issuer uses to determine the APR for its accounts. The most commonly used benchmark in the U.S. is the Prime Rate. This rate is set the by the largest banks in the country as a measure of the interest rates that are charged to their lowest risk borrowers. Credit card issuers determine their customers’ APRs by adding a margin of percentage points to the Prime Rate. The margin that is set above the prime rate is usually based on cardholders’ credit scores combined with program-specific offers, such as introductory or promotional rates.
Variable and Nonvariable Rates
Credit cards can be offered as either variable or fixed rate. The interest rate on a variable card will change if the reference rate moves higher or lower. For example, if the Prime Rate is adjusted from 3.25 percent to 3.75 percent, variable accounts linked to that reference rate would have their APRs adjusted upward by .5 percent. The APR on nonvariable accounts is not affected by changes in reference rates, but issuers typically reserve the right to adjust interest rates based on late payments and changes in the marketplace.
Determining a Good APR
Finding a good APR starts with comparisons of interest rates that are being charged on different credit cards for people with similar credit histories. Generally speaking, the lower the cardholder’s credit score, the higher the margin will be above the reference rate. For example, an advertised rate may be applicable only to cardholders that have credit scores in excess of 750. APR comparisons should also be made based on the specifics of the account. If a balance transfer is in the works, the APR might be quite different than rates charged on purchases. Comparing the expiration of promotional rates can also provide intelligence on the credit card that delivers the best overall APR. For example, an APR on a promotional offer that expires after 6 months may result in substantially higher interest charges than an offer that expires in a year.