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

Director of Education and Corporate Communications
Financial Literacy Specialist

If you have credit card debt to pay off, high interest rates are probably the reason you can’t pay it off quickly. Credit cards are notorious for creating a “treadmill” of debt, where you pay and pay, month after month, but you never seem to get anywhere. The reason is often rooted in high APR that’s applied to your balances. These high interest rates eat away at every payment you make, which prevents you from reaching zero efficiently.

This guide helps you understand how credit card interest rates work and what you can do to get ahead of your debt. If you still have questions or would like to talk to a certified credit counselor about options that can help you minimize interest, call (844) 276-1544.

What is APR?

APR is an acronym that stands for annual percentage rate. This is the rate that the creditor applies to calculate interest charges if you carry a balance on your account. Interest charges are how credit card companies generate revenue whenever they extend a line of credit to a consumer. On credit cards, APR is directly equal to the annual interest rate charged on your balance. For loans, APR also may include some fees.

How credit card APR works

Interest charges only apply to credit card debt if you carry a balance over from month to month. If you start a billing cycle at zero, then pay off any charges in-full within that cycle, interest does not apply. This is how you can use high APR credit cards interest-free.

However, if you begin a billing cycle with an outstanding balance, then the creditor applies interest charges to the debt. Here is how that works:

Credit card interest charges create revenue for credit card companies

First, the creditor calculates a periodic interest rate. This is the annual percentage rate divided into the number “periods” (billing cycles) within one year. In most cases, you can calculate the periodic interest rate on your account by dividing the APR listed in your bill by 12.

Then, the creditor multiplies your average daily balance by the periodic interest rate to calculate accrued interest charges for the month. This product is then added to your total credit card balance.

When you make a payment, the creditor deducts these accrued charges from the amount you pay. As a result, only a portion of each payment you make goes to pay off principal; that’s the actual debt that you owe.

High APR leads to higher accrued interest charges. So, if you have high credit card interest rates, it makes it difficult to get out of debt. With minimum payments, you may only pay off a few dollars at a time, depending on the APR.

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

A credit card may have multiple interest rates that apply at different times. The primary rate is known as purchase APR or standard APR for purchases. This is the rate applied when you use your card in a store, at a restaurant, or to shop online or through an app. However, that may not be the only APR listed in your credit card statement.

Promotional/introductory APR

This is a special rate that applies for a period of time after you open the account. In most cases, it offers 0% APR for 6-24 months, depending on your credit score. Once the promotional period ends, the standard purchase APR takes effect.

Balance transfer APR

This is the rate applied to balances you transfer to the card from other accounts. Balance transfers offer one type of debt consolidation, because they allow you to combine multiple balances on a single card. These cards typically offer promotional periods, such as 0% APR or low APR on transfers for 6, 12 or 18 months. Once the promotion period ends however, this rate tends to be higher than the standard rate for purchases

Cash advance APR

This rate applies only when you use your credit card at an ATM to withdraw cash. You can use a credit card to take out cash just like a debit card, but interest charges apply. Cash advance APR applies immediately; there is no grace period so interest charges begin to accrue quickly. This rate tends to be much higher than most other rates on the card. Most experts usually advise against using credit cards for cash advances, because this rate is so high

Penalty APR

This is the rate that the creditor imposes if you miss a payment by more than 60 days. Instead of applying the regular purchase APR, they apply a penalty rate. The average penalty APR rate is 29.99% You must make six consecutive payments on-time to remove penalty APR and restore your standard rate.

How do credit card companies determine my rate?

There is not one set rate, even for a specific credit card. The rate on your Capital One® Venture® card may be significantly different than your neighbor’s rate on the same card.  That’s because creditors use a combination of factors to determine your individual rate. How high or low your credit card APR goes is largely based on the following:

When creditors jack up interest rates, it’s difficult to pay off debt. Credit card debt consolidation lowers high APR.
  • The benchmark interest rate from the Federal Reserve at the time you open the account. The current benchmark rate is between 0% and 0.25%.[1]
  • 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.

IMPORTANT NOTE: Credit card APR can change!

Most (not all) credit cards have variable interest rates. That means APR can change based on what’s happening with the economy. If the Federal Reserve increases benchmark interest rates, expect your rates to increase, too. So, if the Fed raises the rate by 0.25% then you could see your credit card APR increase as well.

Of course, if the economy is weak and the Fed drops interest rates, it’s good for anyone carrying a balance. Your debt may be slightly easier to pay off. However, most credit card companies won’t lower your rates as quickly as they increased them after a Fed rate hike.[2]

You should watch the rates listed in your monthly statements to see if they reduce. If not, call the creditor to request that they lower your card’s APR.

Addressing Challenges Created by High Credit Card APR

Expect higher costs following the latest interest rate hike

Even a low APR credit card still has relatively high-interest charges. If you carry balances over month-to-month, then you’re probably burning money on accrued interest charges. And you shouldn’t be happy about that. In fact, you should constantly look for ways to reduce the APR applied to your debt.

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

Credit card companies like to keep their customers happy. One way that they do that is to offer promotional interest rates to existing customers. They may offer you a lower promotional interest rate on purchases or even a specialty APR like a lower balance transfer interest rate.

“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, in 2021 some credit card companies are offering 0% APR for up to 14 months on balance transfers. Their goal is to ensure they keep customers using their cards so they can continue generating revenue. The benefit for customers is that it offers an easy way to consolidate debt interest-free without getting a new balance transfer 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

As we mention above, loans tend to have much lower interest rates versus credit cards. With your same credit score, you may qualify for a personal loan at 5% APR where you qualify for 15% APR on a credit card. So, it sometimes makes sense to take out a personal loan and use the funds to pay off your credit card balances. This is known as a debt consolidation loan.

Debt consolidation loans are often beneficial when you have too much debt to consolidate and pay off with a balance transfer. Paying off $3,000 in debt within 12 months is easy; paying off $30,000 in the same timeframe is not – the monthly payments would top $2,500.

Since most people don’t have that kind of cash available to pay off debt interest-free, then it makes sense to at least aim for a lower rate. If you can cut interest charges by two thirds from 15% to 5%, that makes it dramatically easier to pay off what you owe. Even if you keep your monthly payments the same, you’ll be out of debt much faster. You’ll also pay notably less interest as you work to reach zero.

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:

Case Study

Jennifer from Highlands Ranch, CO

“Consolidated Credit has helped me so much and in 4 years with less than one to go, most of the credit card debt I accumulated in a decade of overspending is gone and I’m almost debt free. ”

Where she started:
  • Total unsecured debt: $23,977.00
  • Estimated interest charges: $13,121.43
  • Time to payoff: 11 years, 11 months
  • Total monthly payments: $959.08
After DMP enrollment:
  • Average negotiated interest rate: 5.20%
  • Total interest charges: $2,684.55
  • Time to payoff: 4 years, 3 months
  • Total monthly payment: $529.00
Time Saved

7 years, 8 months

Monthly Savings


Interest Saved


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

In 2009, Congress passed the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act). Much of the law was geared towards regulating how and when a creditor could change the APR on a customer account. So, it stops creditors from increasing your rates without notice. It also establishes the process for removing penalty APR.

While the law protects consumers, it also includes language that can affect how your debts get repaid, based on APR. One key part of the law states that a creditor must apply an excess amount paid above the minimum payment to the part of the balance with the highest APR first.

This can affect you significantly if you’re paying more than the minimum required to pay off your balances faster. Here are a few examples of how:

  • If you take out a cash advance on a card, it will generally have a higher APR applied than the rate for your standard purchases. This balance would get paid off first, which is good.
  • On the other hand, if you get a balance transfer card to consolidate debt, you want to avoid making regular purchases on the card. Transfer cards tend to have lower APR and even 0% when you first open the account. If you use the card for regular purchases, then the payments you make would pay off those charges instead of the balance you consolidated. So, avoid using transfer cards for regular purchases.

See if a debt management program can help lower the interest rates applied to your balances.