Interest Rates and APR

Credit card companies, or issuers, charge a yearly rate of interest on the money you borrow from them. That rate is the annual percentage rate (APR), and it varies according to several factors, including credit history and card types.

  • Variable: These APRs start at one rate and then may increase or decrease depending on market conditions.
  • Fixed: These APRs remain the same unless the card issuer notifies you in advance about a change.
  • Introductory: These APRs are usually low and offered as an incentive to apply for and use a card. They may also be called promotional or teaser rates. As the name implies, they increase automatically after the introductory period. 
  • Cash advance: This APR applies to any cash you borrow against your credit card and is often significantly higher than the APR you pay for purchases made on the card. 
  • Penalty: This APR applies when a card issuer has not received the required minimum periodic payment within 60 days after the due date for that payment. A penalty APR is typically significantly higher than the APR the consumer was assigned at account opening. 

All of these APRs must be clearly displayed on your credit card agreement, as well as on the card issuer’s website.

Fees and Penalties

Most credit cards come with fees, many of which are avoidable if you use your card wisely. Some fees, like late payment fees, encourage you to follow the rules the card issuer has set. Other fees, like annual fees, help cover the cost of the card’s special features, like travel rewards. Your card issuer may also charge fees to help pay for transactions, like a balance transfer. Here is a bit more about some of the fees you may encounter:

  • Annual Fee: Some credit card issuers charge users an annual or yearly fee for the privilege of using their card. This fee is most common with cards that offer rewards, such as airline miles, hotel stays or cash back on purchases. Sometimes, a creditor waives this fee for the first year as a way to encourage you to sign up for the card and use it for purchases. If you do choose to close the account, ask about getting a refund for the unused portion of the fee.
  • Penalty rate: If you pay your monthly bill late by 61 days or more, your credit card issuer can increase the interest rate that you pay. It’s called a penalty rate or default interest rate. They may also charge a fee for the missed or late payment.
  • Over-limit fee: Credit card companies set a limit to how much you can charge to a card. Exceeding this limit can result in a fee. Over-limit fees typically range from $25 to $35. Credit card companies can’t charge a higher fee than the amount you exceeded the credit limit by. For instance, if you went $20 over your credit limit, the over-limit fee can’t be more than $20. Credit card issuers may only charge these fees if you expressly opt in to allow over-limit transactions.
  • Overdraft fee: A credit card company can charge a missed payment fee if a check you use to make your monthly payment bounces or a debit card is overdrawn due to insufficient funds in your bank account. They also can implement a higher penalty interest rate if the bounced check results in your account being 61 days or more delinquent.


Your balance reflects the amount of charges and interest you owe to the credit card issuer. Because your balance may vary from day to day, depending on how often you use the card, credit card companies use different methods to determine the balance that is subject to interest charges.

  • Average daily balance: The issuer tallies each month’s daily balance, divides that number by the number of days in the billing cycle and charges interest on that total.
  • Adjusted balance: The issuer deducts payments and credits made during the billing cycle from the outstanding balance at the beginning of the billing cycle. Interest is charged on the remaining balance.
  • Previous balance: The issuer uses the outstanding balance at the beginning of the billing cycle.
  • Daily balance: The issuer figures the balance each day by taking the beginning balance on each day of the billing cycle, adding any new purchases and subtracting any payments and credits. 

When you make a purchase with your credit card, it may take a few days for the expense to show up on your account. “Float” is the difference in time between the actual transaction and when the transaction appears on your statement.

Available Credit and Credit Limit

Available credit refers to the difference between your credit limit and the outstanding charges on your account. For instance, if your credit limit is $5,000 and you’ve charged $1,500, then the maximum amount you can still charge to the card (your available credit) is $3,500.

Your credit limit is the maximum amount you can charge to your credit card. Issuers largely rely on your credit history and current debt burden to determine this amount. Typically, the better your credit score, the higher your limit. Some issuers also take into account the limits on your other credit cards. This information is found on your credit reports. Some cards have predetermined credit limits, meaning everyone who qualifies for the card gets the same limit.


In order to avoid a high-penalty APR, you need to pay at least the minimum payment toward your credit card debt by the due date each month. The minimum payment amount is a percentage (usually two to three percent) of your balance. This balance may include compounded interest, meaning you pay interest on the balance, or principal, as well as additional interest on the interest that accrues on the balance.

The dollar amount of your minimum payment drops as you pay off your balance, but card issuers usually have a certain dollar amount that limits how low minimum payments can go. If you continue to only make minimum payments while interest charges continue to accrue, it will take you longer and cost you more to pay off the debt.  

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