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Reader Question: Interest Rates and APRs on Credit Cards?

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CreditCards_Michael_Swan_FlickrCredit Card Question: What’s the difference between interest rates and APRs on credit cards? – Cheryl

Answer: Hi Cheryl,

This is a really good question because these terms are confusing to a lot of consumers. Basically, the interest rate is the price you pay for borrowing money. On credit card agreements, interest rates are expressed as APRs. According to the Federal Reserve, the APR represents the rate you pay on an annual basis if you carry a balance from one billing cycle to the next.

Now, many credit cards have a grace period. So if you pay your balance in full before the grace period ends, you don’t have to worry about the APR because you’ll avoid paying interest. This is certainly the best way to manage your credit cards.

It’s important to take note that the APRs on credit cards are usually variable. This means the APR is tied to an index, such as the prime rate. If the prime rate increases, your APR increases, too. Credit cards always have a purchase APR, but you might also see different APRs for balance transfers and cash advances. The Penalty APR is usually the highest APR, but the cash advance APR can get pretty high, too.

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Image: Michael Swan, via Flickr.com

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