Credit Card APR: How Do Interest Charges Apply to Your Balances?

Warning: credit card interest compounds daily

Credit card interest charges accrue quickly and that’s because of how fast it compounds. Compound interest means that interest charges from one cycle get rolled into the balance used to calculate the next cycle. Since credit card interest compounds daily, your balance grows a small amount with each day that passes.

This is why it’s so important not to let credit card debt linger. It’s growing with each passing day!

Types of credit card APR

Most credit cards have more than one APR, depending on how you use the card. The most common is the purchase APR, which applies when you use your card to shop in-store, online, at restaurants, or through apps. But if you review your credit card statement closely, you’ll likely see several APRs listed, each tied to a different type of transaction.

Promotional/introductory APR

A promotional APR is a special, low-interest rate – often 0% APR – that applies for a limited time when you open a new credit card or accept a targeted offer. These intro periods typically last 6 to 21 months, depending on the card.

After the promotional period ends, the standard purchase APR applies to any remaining balance.

Balance transfer APR

The balance transfer APR applies to balances you move from other credit cards onto a new card. Balance transfers are a common debt consolidation strategy because they allow you to combine multiple balances into one, often with a promotional 0% APR for a limited time.

These promo periods usually last 6 to 21 months, depending on the card. Once the promotional period ends, the balance transfer APR often increases, and it may be higher than your standard purchase APR.

Most balance transfers also come with a transfer fee, usually 3% to 5% of the amount transferred. It’s important to factor that into your payoff plan.

Cash advance APR

The cash advance APR applies when you withdraw cash from an ATM using your credit card or make similar transactions, such as using a convenience check (a check tied to your credit card account) or purchasing a money order or gift card.

Unlike regular purchases, cash advances don’t have a grace period – interest charges begin immediately and are often at a much higher rate than your purchase APR.

Most cards also charge a cash advance fee of 3% to 5% of the amount withdrawn.

With the high APR and immediate interest, cash advances are one of the most expensive ways to borrow. They’re best avoided unless you’re in a true emergency.

Penalty APR

A penalty APR is a significantly higher interest rate that your issuer may apply if you miss a payment by more than 60 days. Instead of your usual APR, your rate may increase to 29.99% or higher – some cards even reach as high as 34.99%.

To remove the penalty APR and return to your standard rate, most issuers require six consecutive on-time payments.

Not all cards include a penalty APR, so it’s important to read your card’s terms and stay current on payments to avoid triggering it.

How do credit card companies determine my rate?

There’s no one-size-fits-all interest rate, even for the same credit card. Your APR might be very different from someone else’s, even if you both have the same card. That’s because issuers consider a mix of factors to determine your individual rate.

• One of the biggest influences is the Federal Reserve’s benchmark rate at the time you open your account. As of mid-2025, the Fed’s target range is 4.25% to 4.50%. When the Fed raises interest rates, typically rise as well. If the Fed lowers rates, APRs might drop, but lenders tend to move slowly on the way down.
• Your credit score
• They type of card you wish to open. For example, reward credit cards usually have higher APR

If you have excellent credit and apply for a low APR credit card when the Fed drops interest rates, you can minimize interest charges. Changes in circumstances may change your rates.

Credit card APR can change

IMPORTANT NOTE: Most credit cards have variable APRs, which means your rate can fluctuate up or down depending on what’s happening in the economy.

When the Federal Reserve raises its benchmark interest rate, your credit card APR often rises shortly after, usually by the same amount. That’s exactly what’s happened in recent years: the Fed raised rates aggressively to fight inflation, and credit card APRs jumped across the board.

If the Fed eventually cuts rates, your APR could also drop, but issuers are usually slow to pass along those savings.

That’s why it’s smart to regularly check the APR listed on your statement. If your rate hasn’t come down after broader rate cuts, call your credit card company and ask for a lower rate, especially if your credit has improved.

Addressing challenges created by high credit card APR

Even “low” APRs by credit card standards can cost you a lot over time. If you carry a monthly balance, you’re probably losing money to interest. Don’t settle. Look for opportunities to reduce your APR and pay down debt faster.

Addressing challenges with high APR on credit cards »

Option 1: Talk to your creditors to negotiate lower interest rates

This should be a task that you do routinely, at least once every few years. Never be satisfied with the rate you have on an existing account. If you haven’t talked to a creditor in a while, give them a call to ask a customer service representative for a rate reduction. You will have more success if you…

• Have been a loyal customer for a number of years
• Your credit score improved since you opened the account or requested your last reduction
• You have not missed any payments

The customer service representative may need to pass you up to a supervisor to authorize the reduction. It’s good to be armed with as much information as possible. So, refer back to the chart above or find current average credit card interest rates through another accredited online provider. This will give you a starting point for negotiations if you know how far off the average rate you are.

Take advantage of promotional rate offers on your existing cards

Some credit card issuers offer temporary promotional rates to existing customers, like a lower APR on new purchases or a limited-time balance transfer offer. These promotions can help you manage debt strategically without opening a new account.

“Take advantage of promotional interest rates when your credit card companies offer them,” says Gary Herman, President of Consolidated Credit. “You can use these lower rates to strategically manage your debt. Using a card that has a lower purchase APR or transferring balances to a card that offers 0% APR can be extremely beneficial.”

For example, a card you already have might offer 0% APR on balance transfers for 12–18 months. These offers are typically sent by mail, email, or listed in your online account. If you qualify, it’s a convenient way to consolidate debt interest-free, without applying for a new card.

Find more tips for negotiating lower interest rates »

Option 2: Consider balance transfers while your debt is still manageable

Let’s say you run up a $3,000 balance on a cash-back reward credit card that has 21% APR. For most budgets, that amount of debt will take at least a few billing cycles to pay off. Even if you pay more than the minimum payment or make fixed payments, interest charges will apply. And the longer it takes to reach zero, the more money you burn.

If you add $50 extra on top of the minimum payment, you cut interest charges to $1,450. But it still takes you over four years to eliminate the debt. And, if you make $300 fixed payments, you reduce charges even further; down to just $326.79.

Still, even with fixed payments it costs more than 10% of what you borrowed to repay what you owe. In this case, it still takes a year to pay off the debt, giving the creditor 12 opportunities to apply interest charges.

In many cases, it may be financially beneficial to transfer that balance to a 0% APR balance transfer credit card. With good credit, you can get a 0% promotion period of 12 months. Now make that same $300 fixed payment. You’ll be out of debt in 10-11 months instead of 12 without any interest charges applied. So, it’s faster and more cost effective.

Could you benefit from a credit card balance transfer? »

Option 3: Consolidate credit card debt with a personal loan

If you have good credit, a personal loan could be a more affordable way to manage your credit card balances. These loans may come with lower interest rates than credit cards. Sometimes as low as 8% to 10%, while credit cards can charge rates of 20% or more.

This approach, known as a debt consolidation loan, can make sense when you’re dealing with a substantial amount of debt that’s difficult to manage with a balance transfer alone.

For example, consolidating $3,000 with a 0% APR balance transfer card might be manageable. But if your debt totals $30,000, paying it off in just 12 months would require more than $2,500 per month, which isn’t realistic for most people.

A personal loan with a lower rate gives you more breathing room. Even if you keep your monthly payments the same, a larger portion of each payment is applied toward reducing the balance, rather than covering interest. That can help you get out of debt faster and spend less along the way.

Is a debt consolidation loan right for you? »

Option 4: Let professionals negotiate for you

All the options above, including negotiation, require that you have good credit and positive payment history. If you don’t, they’re less likely to work effectively. For instance, if you have subprime credit, you may not get approved at all for a balance transfer credit card. Even if you can get approved for a persona loan, the interest rate might be around 12%; that may not provide the rate reduction benefits you need.

In this case, you may need professional help to lower interest rates. This usually involves working with a consumer credit counseling agency. You enroll in a voluntary repayment plan called a debt management program. Then the credit counseling team negotiates to reduce or eliminate interest charges with each of your creditors.

Here is an example of how a debt management plan helped one client eliminate their debt:

How the Credit CARD Act affects APR and paying off your balances

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act, better known as the Credit CARD Act. One of its primary objectives was to safeguard consumers from sudden interest rate fluctuations. Thanks to this law, credit card companies must give advance notice before raising your APR, and they’re required to follow clear rules about how and when penalty APRs can be removed.

The law also impacts how your payments are applied – something that matters a lot if you’re trying to pay off your debt efficiently.

When you make a payment exceeding the minimum, card issuers must apply the excess amount to the balance with the highest APR first. That rule can help you pay down high-interest debt faster – if you’re aware of how it works.

Here’s how it affects you:

• If you take out a cash advance, which typically has a much higher APR than purchases, your payments will be applied to that balance first. That’s beneficial.
  
  
• However, if you use a balance transfer card to consolidate debt, then make new purchases on the same card, those new charges could take priority for repayment. That’s because new purchases may carry a higher APR than the 0% transferred balance, and by law, extra payments must be applied to the higher-rate portion first.

To make the most of a balance transfer, avoid making regular purchases on the card unless you’re sure they’re also covered by the promotional rate.