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APR and other interest rates

Shopping around for credit cards can be confusing. You'll need to choose from different features like the APR, interest rates and promotional offers.

Here we've explained how APR works and broken down the jargon around the interest rates, offers and fees you're likely to see.

What does APR stand for?

APR stands for annual percentage rate.

What is APR?

Whenever you borrow money on a credit card, you'll usually find there's an interest rate applied to it. This is typically expressed as an APR. The APR is the yearly cost of borrowing, this is what you'll pay on top of the money you borrow.

What is the representative APR?

When you shop around for a credit card, you'll see each one has an APR. This is usually the representative APR. It's the percentage you'll pay back to your credit provider.

If you select an APR based on the representative rate, it's important to remember that not everyone will receive that rate. At least 51% of successful applicants receive the representative APR and the rest may receive a different rate, which could be higher than this.

Representative Example

When you see a representative example, you're looking at the annual rate of interest you'll have to pay on everyday spending, together with any extra fees such as the annual fee.

It's calculated using an example credit amount of £1,200 and describes the interest rate for a whole year.

This doesn't mean you'll receive the same credit amount or interest rate, but it helps you to compare how much your borrowing might cost you across your different credit options.

What can affect APR?

Your credit card provider decides on the rate you'll pay by looking at your credit score. Your credit score tells your provider if there's a risk of lending to you in the future.

If you've missed or made a late repayment on a credit account or a mobile phone contract before, it can negatively affect your credit score. This could affect the APR you ultimately receive.

If you're not given the advertised rate, you'll receive a personal APR.

The cost of borrowing

Once you know your APR, you'll roughly be able to work out the cost of borrowing.

On a basic level, borrowing money at an APR of 10% means you'll pay 10% of the amount that you borrow over a year plus the original credit amount.

However, the full amount you end up paying depends on:

  • how much you choose to pay back each month
  • how long it takes you to back that money, and
  • how you use your credit amount while you’re paying it off.

The total amount you pay back may be affected by the repayment method you choose and if you make early or overdue payments. It may also be affected by other rates and fees you'll see listed below.

Making repayments

When you start repaying the money you borrow and the interest each month, there are two main repayment methods – minimum and fixed.

Minimum repayments are usually between 2 and 5% of the borrowed credit on your account. Fixed repayments are a set amount such as £10.

Credit cards allow you to choose your repayment amounts each month, including making minimum repayments.

There are of course a few other options. You can choose to make minimum repayments and pay a fixed amount on top. You can also pay off your balance in full each month.

With repayments, it's important to remember that the smaller the amount you pay back each month, the longer it will take you to pay off your balance. This often means you'll pay more interest too.

Other rates and fees you might see

When you're looking for a credit card, you'll see lots of interest rates and fees. This is because the services you can use with different credit cards often have different interest rates attached. For example, services like balance transfers could carry a different interest rate to purchases.

Here we've explained what these rates and fees mean to you.

Purchase rates

To make purchases on your credit card, you'll have to pay a purchase rate.

This is the interest you'll pay on the money that you've borrowed to make purchases (such as petrol or new shoes).

If you don't pay off your credit card in full each month, you'll be charged a purchase rate on the outstanding balance.

Cash advance rates

A cash advance, or cash withdrawal, is the money you withdraw with your credit card, from an ATM for example.

When you withdraw cash from your credit account you'll have to pay interest on it.

The interest you pay is calculated daily. This means, every day you don't pay off your balance in full you'll have to pay more interest, so it's best to keep withdrawals just for emergencies where possible.

Cash advance fees

When you withdraw cash from your credit account, you also have to pay a fee for this service. This is usually around 3% of the amount you withdraw.

If you take a cash advance while you're abroad, the ATM might charge you an extra fee. That's on top of the usual cash advance fee, and any interest you pay on cash advances.

You'll also need to pay interest on the fees you receive for using the cash advance service.

Balance transfer rates

A balance transfer rate is the rate of interest you pay on any debt you transfer to your credit card from other credit or store cards.

Some people move their debt to a new card to make it more manageable or to take advantage of a lower interest rate than the one they're paying.

Balance transfer fees

A balance transfer fee is the money you pay for using the balance transfer service.

This is a set percentage of the amount you transfer, usually between 1 and 5%, which is added to your outstanding balance.

Some credit cards don't charge a fee for balance transfers, but this isn't usually the case.

Promotional offers

When you compare credit cards, you might see that some have promotional offers. This is usually a period of time where a service you use on your credit card is interest free.

Services such as balance transfers or purchases may have promotional interest-free or low-interest periods.

For example, if you have an interest rate of 0% on balance transfers for 24 months, you won't pay any interest on transferred debts for 24 months.

If you choose an offer that gives you 0% interest on purchases, it means that for a certain period, you won't have to pay a purchase rate on top of the things you buy.

Often, keeping your promotional offer for the full period depends on you paying off your balance in full and on time. If you miss a payment or you're late with a payment, the promotional period could end.

Once the interest free period ends, you'll have to pay the standard interest rate on any remaining balance.

Remember: Interest builds up over time, so it's best to pay back the money you've borrowed in full as soon as you can. The longer you take to pay off the money you've borrowed, the more interest you'll have to pay.

Now you're clued up on interest rates, why not read about everyday credit cards and student credit cards in our next instalment.

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