When shopping for a credit card, one of the most important factors to consider is the APR (Annual Percentage Rate). But what exactly is a good APR for a credit card, and how can it impact your finances? Understanding APR is essential for making an informed decision when choosing a credit card. In this guide, we’ll explain what APR is, how it works, and how to find the best APR for your needs.
What is APR on a Credit Card?
APR stands for Annual Percentage Rate. It is the cost of borrowing on a credit card expressed as a yearly interest rate. When you carry a balance on your credit card (meaning you don't pay off your full balance by the due date), the APR is the rate at which you’ll be charged interest on the outstanding amount.
Credit card companies use APR to calculate how much interest you will pay on any balance that remains on the card after the payment due date. Different types of credit cards have different APRs depending on the provider, your credit score, and the type of card.
How is APR Calculated on a Credit Card?
APR is generally expressed as a yearly interest rate, but the interest is calculated monthly. Most credit card providers charge interest on a daily basis, which means that the APR is divided by 365 to determine your daily interest rate.
For example, if your credit card has an APR of 18%, the interest rate charged daily is 18% divided by 365, which equals approximately 0.0493%. This rate is then applied to the outstanding balance each day.
What is Considered a Good APR for a Credit Card in the UK?
A good APR for a credit card depends on your financial situation and credit score, but here are some general guidelines:
1. Low APR (Under 10%)
What it means: A credit card with an APR under 10% is considered to have a very low rate. These cards are usually offered to people with excellent credit scores or those who qualify for special promotional offers.
When to look for it: If you tend to carry a balance month-to-month, a low APR can save you a significant amount in interest over time. It's also ideal if you're planning on making large purchases and paying them off over several months.
2. Average APR (10% - 20%)
What it means: Most standard credit cards will have an APR in this range. This is considered a reasonable rate, especially for people with a good to average credit score.
When to look for it: This is a good APR if you plan to pay off your balance relatively quickly or use the card for everyday purchases and pay it off in full each month.
3. High APR (Above 20%)
What it means: Credit cards with an APR above 20% are generally reserved for people with lower credit scores or those who have a history of missed payments. High APR cards come with higher interest charges, making them expensive if you carry a balance.
When to look for it: If you're offered a credit card with a high APR, it’s best to pay off your balance as quickly as possible. Consider looking for a balance transfer card with a lower APR if you have existing debt to transfer.
How Does APR Affect Your Credit Card Balance?
The APR can significantly impact how much you pay in interest if you carry a balance. The higher the APR, the more interest you’ll pay on your outstanding balance each month. For example:
If you have a £500 balance and an APR of 18%, you could pay around £8.25 in interest for one month if you don’t pay off your balance in full. Over time, this amount can add up and make it more expensive to carry a balance.
On the other hand, if your APR is lower (say 10%), the same £500 balance would only accrue about £4.16 in interest over one month.
How to Find the Best APR for a Credit Card
When comparing credit cards, consider the following factors to ensure you're choosing a card with the best APR for your needs:
1. Check Your Credit Score
Why it matters: Your credit score plays a significant role in determining the APR you'll be offered. Generally, the higher your credit score, the lower your APR will be. You can check your credit score for free with services like Experian or ClearScore.
Tip: If your score is below average, consider improving it before applying for a new credit card to get access to better APR offers.
2. Look for Promotional Offers
Why it matters: Many credit cards offer introductory 0% APR for a certain period (usually for balance transfers or purchases). This is a great option if you're planning on making large purchases or transferring an existing balance to a new card.
Tip: Be mindful of when the promotional period ends, as the APR can rise significantly after that period.
3. Consider Balance Transfer Cards
Why it matters: Balance transfer cards often offer low or 0% APR for an introductory period, allowing you to transfer existing debt from a high-interest card and save on interest. This is ideal if you're carrying a balance on a high-APR card and want to save money in the long run.
Tip: Always check the balance transfer fee, as this can impact the overall cost of the transfer.
4. Compare Credit Cards Using Comparison Websites
Why it matters: Use comparison websites like MoneySuperMarket or Compare the Market to find and compare the best credit cards with low APRs. These sites provide a wide range of options, so you can easily find the card that fits your needs and financial situation.
Tip: Make sure to check the APR for both purchases and balance transfers, as these can differ.
How to Reduce the Impact of APR
If you have a credit card with a high APR, here are some tips to minimise the amount of interest you pay:
Pay more than the minimum: Try to pay more than the minimum required each month. This will help you pay off your balance faster and reduce the amount of interest charged.
Pay off your balance in full each month: If possible, try to pay off your credit card balance in full each month to avoid interest charges altogether.
Use balance transfers: If you’re paying high interest on an existing balance, consider transferring the balance to a card with a 0% introductory APR on balance transfers to save money on interest.
Final Thoughts
When choosing a credit card, the APR is one of the most important factors to consider. A lower APR means lower interest costs, which is especially important if you plan to carry a balance. By understanding how APR works and comparing credit card options, you can make a smarter financial decision and avoid paying unnecessary interest.
Remember to shop around, check your credit score, and use comparison tools to find the best credit card for your needs. By doing so, you’ll be able to manage your finances more effectively and save money in the long run.
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