What is Annual Percentage Rate (APR)? And how it works?

Annual Percentage Rate (APR)-

It is basically the interest rate (for borrowing money) for a whole year not for just a month, as applied on a loan, mortgage loan, credit card, etc. Understand, what an APR is and how it’s calculated and applied can help you make more confident about credit card decisions. Credit Card provider must disclose APR before you sign any credit card agreement.

What is an APR?
APR is an annualized representation of your interest rate, including any fees or additional costs. In the case of credit card, you don’t charged any interest, if you pay off your full bill on time. (In interest free period)
How does APR work?
Apr often depends on interest rates in the broader economy and prime rate, variable APRs fluctuate depending on your credit score .  when you keep a balance on your card, your card provider uses the APR for calculating interest to add to your balance. It is calculated by using your daily balance—the amount of money you owe at the end of each day. For this the credit card provider divides your APR by 365(days in a year) to convert to a daily periodic rate.
Let’s take an example – If your APR is 22% and you have a daily balance of ₹8,000 on your card for the month. Your card issuer assumes 365 days per year. How much interest will you incur today? To calculate this, find the daily periodic rate (22% divided by 365 equals 0.0602%). Then, multiply that daily rate by your account balance (₹8,000) for an interest charge of ₹4.81

Most important thing about credit card is that you don’t necessarily charged interest. Most cards have grace period, which allows you to borrow money and pay no interest as long as you pay off your entire card balance each month. However, if you carry a balance on your credit card, you will be charged interest based on the APR.

Types of APR
Types of  APRs based on how you use your credit card. When you’re selecting a credit card, it’s a good idea to consider these rates in addition to your credit needs.

Purchase APR
It is a most common APR of credit card. This is the interest rate charged for new purchases made with your credit card that are not fully paid before the end of the card’s grace period

If you transferred any balance from one card to another than a balance transfer APR applies. It is not like purchase APR, the balance transfer APR is charged from the date you make a transfer and with no grace period, unless associated with an introductory APR(see promotional APR)

Promotional APR
(or Introductory APR) An additional APR that offers lower APR for limited time period. It can apply to specific transactions as well as balance transfers, cash advances or any combination.

Note.      You have to pay off your balance in full before the intro period ends, otherwise some cards (typically store cards) will charge you all the interest accrued since the purchase or balance transfer date.


Cash advance APR
It is charged for borrowing cash from your credit card it is higher than purchase APR and balance transfer APR. There is also a cash advance fee and no grace period. So don’t withdraw cash from your credit card unless it is an emergency, If you withdraw than repay as quick as possible.

Penalty APR
Usually the highest APR.
When you miss a payment or pay late, many cards will raise your APR to a new, higher rate. In addition to an increased APR, you risk many other benifits and damage to your credit score.

4 responses to “What is Annual Percentage Rate (APR)? And how it works?”

  1. […] Credit cards if not handled responsibly, can lead you to a big debt. On the other side a credit card can be a very helpful for managing money while using it in a responsible manner.1.  How to use Credit Card effectively2.  Interest on credit card how to calculate3.  Interest free period of Credit Cards4. How to choose Credit Card5. what is Annual Percentage Rate […]


  2. […] the balance you didn’t pay. when you keep a balance on your card, your card provider uses the APR(Annual Percentage Rate) for calculating interest to add to your balance. It is calculated by using your daily […]


  3. […] terms and fees that make easy to pick a credit suitable for you APR: This is the interest rate you’ll pay if you carry a balance. Many credit cards have a low […]


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