How APR works
Under the federal Truth in Lending Act, lenders must show you the APR before you borrow, so you can compare offers on the same basis.
- Credit cards: the APR is the interest rate. Most cards charge interest daily using a daily periodic rate (APR ÷ 365) on your average daily balance. Cards can have several APRs — for purchases, balance transfers, cash advances and a higher penalty APR.
- Loans and mortgages: the APR includes the interest rate plus certain fees, such as origination fees and points. That is why a mortgage APR is usually a bit higher than its interest rate.
Example
You carry a $1,000 credit card balance at 24% APR. One month of interest is about $1,000 × 24% ÷ 12 = $20. Pay only $25 and just $5 comes off the balance. Pay $100 and $80 does. The credit card payoff calculator runs these numbers month by month for your own card.
APR vs APY
APR describes what you pay on debt and doesn't include compounding. APY describes what you earn on savings and does include compounding. A card at 24% APR that compounds daily actually costs a little more than 24% over a year.
Why APR matters
When you have several debts, the APR tells you which one grows fastest. Paying the highest-APR balance first — the debt avalanche — costs the least interest overall. The debt payoff calculator shows the difference in dollars.
Frequently asked questions
What is a good APR for a credit card?
Is APR the same as the interest rate?
How do I lower my APR?
Written by
Finance Specialist & Editor, VaultlyApps
Researched against primary US sources and reviewed by a finance expert on our team. Written for US readers — general education, not financial, tax or legal advice. Editorial policy · Disclaimer
