The world of credit cards can be confusing, whether you’re new to it or not.
One question we get pretty frequently is: What is the difference between the interest rate and the annual percentage rate (APR)? Is APR the same as interest rate?
What’s the difference between interest rate and APR?
With some financial products, the interest rate and the APR are different. With credit cards, though, they’re basically the same.
The U.S. Government’s Truth in Lending Act requires all consumer lenders to state their interest rates as APRs. APR is considered the “real” annual cost of borrowing money, including fees and other charges in addition to the interest rate. If you take out a mortgage, for example, you’ll pay an origination fee and other charges upfront; these then get factored into the APR on your mortgage. Credit cards don’t do that, meaning the APR on your card is precisely equal to your interest rate.
When you take out a mortgage, for example, you often have to pay an origination fee, points and other charges upfront. The APR takes those into account, so a mortgage with an interest rate of, say, 5.5% might actually cost you something like 5.8% a year.
Is APR the same as the interest rate?
For credit cards, yes, the APR is essentially the same as the interest rate. However, for other interest-accruing products like mortgages and car loans, the APR may be higher than the interest rate. That is because there are often fees and charges incorporated into the APR on these products.
With credit cards, the APR is just interest. Any annual fee that you pay or charges like balance transfers, cash advances and late payments don’t get included in the APR. That’s because companies can’t predict which cardholders will incur which fees.
Of course, credit card APR can also be avoided completely by paying your balance on time and in full, one of TPG’s ten commandments of credit card rewards.
If you’re working on debt, check out TPG’s list of the best zero-interest cards on the market to help reduce your borrowing costs.