What is APR?
APR is an acronym for annual percentage rate. It is the annual cost of borrowing which also includes additional fees that are associated with the credit procuring process (processing fees, late fees, etc.). Interest rates, on the other hand, are simply the cost of borrowing money. As such, APRs are usually higher than interest rates.
And credit cards aren’t the only things that have these rates; any financial interaction the creates debt (i.e. auto loans, student loans, mortgages) will also have an APR as part of their borrowing terms.
How are APRs Calculated?
While your credit card may have the logo and name of a hotel chain on the front, they’re not the ones determining how much you will pay on your card. Credit issuers, whether it be a bank or another type of financial institution, create the APR and all other fees that are associated with borrowing money.
APRs are typically calculated by combining the Prime Rate and the bank’s margin. Since the Prime Rate fluctuates every so often, most credit cards have variable APRs that change along with the market. This percentage can also be affected by one’s credit history (commonly referred to as “creditworthiness”) as lower credit scores will incur steeper APRs than high credit scores.
The average APR for credit cards falls between 16 – 23%, although rewards credit cards typically have the highest rates of all credit card types.
Different Types of APRs
Additionally, credit card issues may have several types of APRs depending on the types of transaction types such as balance transfers, cash advances, or penalty APR for late payments.
- Purchase APR: The rate that charged on purchases when balances rollover from one month to another.
- Balance Transfer APR: The rate charged on balances brought from another debt source, such as a previous credit card balance or a loan.
- Cash Advance APR: Typically, the higher of all credit card APR types. This is the rate for borrowing money against your credit card. Unlike purchase APRs which usually have a grace period, interest will be charged immediately, and compounds daily.
- Introductory APR: A promotional period of reduced APR that can most commonly apply to purchase and balance transfer APRs. During this intro offer, balances will not incur interest payments, allowing cardholders to carry balances from month-to-month without penalty. After this promotion period ends, regular APR rates will apply.
- Variable APR: Can apply to all types of APRs, this is an APR that will fluctuate with the economy, often due to changes in the Prime Rate.
- Fixed APR: An APR that is established by a lender and cannot be altered by the issuer for one year after issuance. This APR does not fluctuate to match each change in the Prime Rate, although fixed rates can increase after the one-year period.
How Does 0% Intro APR Work?
Credit cards that offer an introductory 0% APR period allow cardholders to carry a credit card balance without incurring interest-related fees. Once the promotional period has run its course, all future balances moving forward will be charged interest.
While the length of time on a 0% APR introductory offer will vary from card to card, the typical 0% APR offer usually extends to 12 months. This zero-interest-rate doesn’t only apply to purchases, as many credit cards feature 0% APR on balance transfers as well (keep in mind that balance transfer fees may still apply, unless the terms explicitly say that these fees are waived, you can assume you will be charged to carry out the transfer).
Keep in mind that just because interest isn’t accrued, you are still obligated to make the minimum payment on your 0% APR card. Failing to do so could cause the issue to retract the promotional offer.
In some cases, this interest-free purchase period is actually deferred interest. Unlike 0% APR, which allows you to make purchases completely interest free, deferred interest offerings calculate interest but don’t apply it during the promotional period.
While it will not show on your balance during this promotional period, any unpaid balances after the time frame would result in that interest being tacked. In order to avoid paying interest on this type of zero-interest offer, the balance must be paid in full before the promotional period ends.
Benefits of a 0% Intro APR Credit Card
Since most credit cards only offer 0% intro APR for a limited time, opening this card type can be a valuable strategic tool to bear the burden of upcoming big-ticket purchases. 0% APR cards are a great option for:
- Freelancers, entrepreneurs, and others with irregular income with high overhead and need time to ramp up their generation of revenue
- College students who need to purchase school supplies before their student loan funds are dispersed
- The holiday shopping season, which could easily result in higher than average spending
- Unexpected medical costs for those without enough savings to cover the charge
These are a few examples, but regardless of your circumstance, 0% APR cards present an excellent opportunity to purchase things you might not be able to afford to pay in one lump sum. They provide the convenience of a loan with the long-term credit-building potential that credit cards bring. Cardholders can pay with confidence knowing that they have a bit more breathing room to pay off a larger-than-average expense without the pressure of being charged for carrying a balance.
Editorial Disclosure — The opinions expressed on HotelCards’ reviews, blogs, and all other content on or relating to the website are solely those of the content’s author. They are not reflective of any card issuer or financial institution and have not been reviewed or approved by these entities unless otherwise noted. Further, HotelCards lists credit card offers that are updated daily with information believed to be accurate to the best of our knowledge.
