Credit Card Interest Rates: How They Work & Understanding APR

There are several different charges and fees attached to credit cards, but all cards have an annual percentage rate, known as the APR.

Rebecca Goodman Last updated on 15 January 2021.
Credit Card Interest Rates: How They Work & Understanding APR

When you use a credit card you are charged interest on the amount of money you borrow, unless you pay it back in full at the end of the month.

There are several different charges and fees attached to credit cards, but all cards have an annual percentage rate, known as the APR. Providers need to tell you the APR before you agree to take out a credit card, or any other type of debt, and it demonstrates how much the debt will cost you.

There may also be promotional rates with a credit card, such as an initial 0% interest period on new purchases or balance transfers. Other credit cards will typically have much higher interest rates, such as those for people with poor credit scores.

Here we explain what you need to know about credit card rates, the typical amount you can expect to pay, how rates differ depending on how a card is used and how to get the best rate.

What you need to know about credit card rates

The main way to compare the cost of a credit card is to look at the APR. The APR is shown as a percentage and, the lower it is, the cheaper it will be for you to borrow.

For example, a credit card with an APR of 15% will usually cost you less than a credit card with an APR of 30%, although there may be other terms that will affect the cost too.

In addition to the interest you will pay on your borrowing, the APR also includes any compulsory charges such as annual fees. APR is a good way of comparing the cost of different credit cards, but it doesn’t include expenses for late payments or if you go over the credit card limit.

The APR advertised may also be different from the APR on the card you get. This is because providers only have to give the advertised APR to 51% of customers who apply for a credit card. If your credit score is low, or you haven’t yet built up a credit history, for example, a provider may give you a higher APR than it is advertising.

How rates differ depending on how a card is used

The real amount of interest you pay will depend on how quickly you pay back the balance of the card. If you pay it off in full every month, for example, you won’t pay any additional interest. Whereas if you only make the minimum repayment each month you will pay a higher rate of interest and it will take you longer to pay the card back.

If there are promotional rates on a card, such as the first 12 months being 0% interest, this will also reduce the cost of your borrowing.

Using a credit card to withdraw cash will also increase the amount of interest you pay. This is because cash withdrawals often carry a higher rate. Plus, interest starts being charged immediately, meaning you’ll have to pay some interest even if you clear the balance when it's due.

How to get the best credit card rate

When you apply for a credit card the provider will look at your credit history to decide whether to approve you for the card. It will also use this information to determine what rate to offer you and to set your credit limit.

Those with a good credit score can expect to receive lower rates, while those with poor credit scores likely will face higher rates. If your credit score is poor, or you don’t have one at all, the credit limit on your card may also be lower.

The best way to boost your chances at getting a good rate is to improve your credit score. There are many ways you can do this, including making repayments on time and not going over your limit on credit cards or other debts.

Other factors can help, such as being on the electoral roll and making sure you’re not applying for lots of new credit accounts in a short amount of time.

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How can I see if I’m eligible for a new card?

If you’re not sure what kind of rate you’ll get, or what card you’ll be approved for, use an eligibility checker.

However, these can’t give you a guarantee of the rate a credit card provider will offer. You will find this out only when you are approved for the card.

The APR you are given can also change over time. If you are not borrowing responsibly, for example, you are missing payments or you are late with them, a provider may push up the rate, which will end up costing you more.

Similarly, with some cards — especially those designed for people with poor credit — the rate may go down if you are consistently meeting your repayments on time.

About the author:

Rebecca Goodman is a freelance journalist who has spent the past 10 years working across personal finance publications. Regularly writing for The Guardian, The Sun, The Telegraph, and The Independent. Read more

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