The world of credit can be confusing, whether you’re new to it or not.
One question we get quite often is: what is the difference between interest rates and annual percentage (APR)? Is APR the same as interest rate?
What is the difference between interest rate and APR?
With some financial products, the interest rate and APR are different. However, with credit cards, they are essentially the same thing.
The U.S. Government’s Honest Lending Act requires all consumer lenders to state their interest rate as an APR. The APR is considered the “real” annual cost of borrowing money, which includes fees and charges other than interest. For example, if you take out a mortgage, you will pay upfront fees and other fees; These then count towards the APR on your mortgage. Credit cards don’t do that, which means the APR on your card is exactly equal to your interest rate.
For example, when you take out a mortgage, you often have to pay upfront fees, points, and other fees. The APR takes those things into account, so a mortgage with an interest rate like 5.5% could actually cost you about 5.8% a year.
Is APR the same as interest rate?
For credit cards, yes, the APR is essentially the same as the interest rate. However, for other interest-accumulating products such as mortgages and auto loans, the APR may be higher than the interest rate. That’s because there are often fees and charges built into the APR on these products.
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bottom line
With a credit card, the APR is just interest. Any annual fees you pay or fees such as balance transfers, cash advances, and late payments are not included in the APR. That’s because companies can’t predict which cardholders will incur which fees.
Of course, you can also avoid credit card APR altogether by paying your balance on time and in full, one of TPG’s measures ten commandments of credit card rewards.
If you are in debt, check out TPG’s list of best interest-free card market to help reduce your borrowing costs.
