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If you pay off your credit card balance in full every month, the interest rate on the card—its annual percentage rate (APR)—doesn't really matter. Whether the rate is sky-high or the lowest available, it will never come into play, thanks to the grace period included in the terms and conditions of virtually all credit cards.
Here's how that works, and how you can use this information to avoid costly credit card interest.
How APR Works
The interest rate on a credit card or a loan is what the lender charges you for the use of borrowed funds. The APR on your credit card is a standardized way to note the interest you'll pay on any balance you carry from one month to the next—that is, any portion of the amount you borrow that you don't repay within the month a purchase is made.
Technically, the APR on a credit card is the amount of interest you'd pay on a balance carried over a 12-month period, expressed as a percentage of the balance. On a card with an APR of 19%, for example, carrying a $1,000 balance for one year would result in a $190 interest charge.
In practical terms, it's virtually impossible to maintain a constant balance for a full year, so credit card APRs aren't especially useful for calculating your monthly interest charges. They are helpful when you're comparing card offers, however: Generally speaking, you'll want the lowest APR card you can get, although borrowing limits and annual fees also may help determine which card best meets your needs.
The APR on a credit card is equivalent to its interest rate. That's significantly different from the APRs published for auto loans, mortgages and other installment loans. The APRs for installment loans are a measure of the total cost of the loan, including interest and fees paid over the life of the loan. If a credit card includes an annual fee, the fee isn't reflected in its APR, so it's important to compare fees as well as APR when shopping for credit cards.
Credit Cards With Multiple APRs
When you look at credit card offers or advertisements, the APR that's touted most prominently is the APR for purchases. This is the interest rate that applies anytime you use your card at a retailer, restaurant or online merchant. Many credit cards also have other applicable APRs for cash advances and balance transfers. The cash advance APR typically is several percentage points higher than the APR for purchases. Some cards offer a very low (as low as 0%) balance transfer rate during a special introductory period—this type of card can be useful to pay down debts. Higher penalty APRs may also kick in if you miss one or more payments.
How to Avoid Paying Credit Card Interest
Thanks to the grace period that's a standard of virtually all U.S. credit cards, it's possible to use credit cards frequently without paying a cent in interest. If you pay the full balance due listed on your statement within the grace period, your lender won't charge you interest. The grace period can range from 15 to 21 days and is typically built into the card issuer's billing process: The grace period extends from the date the monthly statement is issued to the payment due date. If you pay off your entire balance by the due date, no interest charges apply.
If you pay off your card in full each month, your card's interest rate is immaterial: The interest charge will be zero, no matter how high or low the APR may be.
When You Can't Pay Your Balance In Full
It's likely that, at some point, a surprise expense or other issue will lead to a credit card balance you cannot pay in full before the end of the month. In most cases, you'll be charged interest on whatever portion of the balance you don't pay off, and interest charges will continue to apply until you bring the card's balance to zero.
Some cards suspend the grace period on new purchases as soon as you carry a balance forward from one month to the next. When that happens, you're not just charged interest on the outstanding balance; any purchases you make while the grace period is suspended are charged interest starting the day of the transaction. Those charges, plus those on the outstanding balance, can add up fast.
Also, some cards maintain the grace period suspension for one or more months after you've paid off your balance. All purchases made while the grace period is suspended are subject to interest charges starting on the day of purchase. It's good to be aware of them and to avoid them when possible.
How to Lower Your Credit Card APR
Leveraging your credit card's grace period is a great way to avoid interest charges. In reality, it's all but inevitable that you'll eventually accrue interest on your purchases, so it's a good idea to seek out the lowest APR credit card.
Credit card APRs can vary from person to person, even for the same card from the same lender. When a lender decides the APR on a credit card, it typically considers several things about a borrower, including their credit report, credit score, income and employment history. Many lenders use credit scores as an initial screen to help match applicants to different cards and interest rates. Applicants with higher credit scores typically are offered a lower APR.
To get the best loan terms available to you, consider doing the following:
- Review your credit reports and report any inaccuracies to the national credit bureaus (Experian, TransUnion and Equifax).
- Check your credit score and take steps to improve it, such as:
- Always pay your bills on time. Just one late payment can cause a significant decline in your credit score.
- Avoid high credit card balances, especially when they exceed 30% of your borrowing limit.
- Apply to multiple lenders and shop carefully for the best deal; consider both APR and annual fees.
- Negotiate with your card issuers to try to reduce the APR on cards you already have.
APRs are great for comparing credit card offers, but the best credit card interest charges are the ones you don't pay at all. By understanding the grace period and managing your balances carefully, you can keep your interest payments at or close to zero no matter what the interest rate is on your card.