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What is APR? Discover how credit card interest works

What is APR? Discover how credit card interest works

When you make a purchase on your credit card, you’re effectively borrowing a sum of money with the promise to pay it back later. But what you borrow and what it ends up costing can be two different amounts because of the interest charged by the credit card provider for lending you this money.

What is APR?

Borrowing money usually comes with an interest rate attached to it. APR stands for Annual Percentage Rate. In a nutshell, it’s the total cost of your borrowing over the course of a year. It includes the interest charged, any fees you’re charged and how often the interest is charged. This is what you’ll pay on top of the money borrowed.

You’ll find APRs are shown as a percentage, making it easier to compare the different rates offered by lenders. All lenders are legally required to calculate their APR in exactly the same way to help you weigh up your options.


What is a good APR?

A good APR depends on whether you can afford to make the repayments at the rate you’ve been offered. APRs are set by lenders based on your credit score, and reflect the risk to the lender.

To stand a better chance of getting your hands on a decent APR, you’ll usually need a good credit score, so it’s worth checking it before you apply.

Doing things like making sure your credit file is correct, keeping on top of all your repayments and creating a history of responsible borrowing will all help your credit file be as good as possible. For more ways to improve your credit score, check out our handy guide.

When applying for credit, it’s important not to make too many applications within a short space of time. This can set alarm bells ringing for lenders as it can look like you’re seeking multiple sources of credit. A good way to avoid multiple credit searches on your credit file is to use our eligibility checker, which lets you know if you’re likely to be eligible for one of our products before doing a full application and doesn’t register a full credit search.  It also saves you time applying for multiple products in the hope you’ll be accepted for one.


Making repayments

Credit cards can give you flexibility when it comes to repayments. Apart from having to make the minimum monthly payments, you can decide how much you pay off each month. You can pay off the balance in full, stick to the minimum payment, or pay an amount somewhere between the two. Just remember, if you only make the minimum payments it will take you longer and could cost you more to clear your balance.


Other things to consider

Although the APR is one of the most important things to think about when choosing your next credit card, you should also look at the benefits and drawbacks of each card. So when you’re shopping around, be on the lookout for the features that will be most important to you based on how you plan to use the card.

The APR is a crucial factor when looking for a credit card. It can be the difference between an affordable monthly repayment and one that squeezes your budget. Knowing how the APR works on credit cards can help you make an informed decision about what’s best for you.