Every credit card comes with an annual percentage rate, or APR, which defines the amount of interest credit card issuers charge their customers. Your APRs can directly affect your personal finances, so understanding it is in your best interest. Here are five things you may not know about APRs, but need to understand to get the most from your credit cards.
1. How APRs Work
Let's start with one important lesson: How an APR is calculated. It can be a little complicated, as there's an annual, monthly and daily aspect.
Credit card issuers bill you on a monthly basis using the Daily Periodic Rate, or DPR. To find your DPR, you can divide your APR by the number of days in a year, 365. If your credit card's APR is 15%, your DPR is .041095% (.15/365 = .041095).
Each day, that percentage is applied to the balance on your card. At the end of the monthly billing cycle, the total DPR accrued each day is then applied to your account.
Most credit card companies grant a grace period of at least 21 days between the purchase date and the payment due date. If you want to avoid paying interest completely, simply pay your balance in full and on time each month. Still confused? No worries — we've got a full explainer on how credit card interest rates are calculated here.
2. APRs Can Fluctuate
Most credit card issuers use a variable APR that can fluctuate. Interest rates are linked to the United States' prime rate, which is the rate banks charge their best customers. Some credit cards carry fixed interest rates. However, most credit card providers charge the prime rate, plus a specific percentage, as a variable APR. As the prime rate rises and falls, your credit card issuer may adjust your APR.
Per federal guidelines, card issuers must provide a 45-day notice if they are increasing your interest rate. Many credit card issuers will also raise your APR as a penalty if you make a late payment. This go-to APR — known as your penalty APR — should be specified in the fine print of your credit card agreement.
3. Your APR Is Negotiable
If you have a reliable history of timely payments with your credit card issuer, you could possibly negotiate a lower interest rate. Credit card companies will actively try to keep you happy, so they could renegotiate your interest rate if you're a good customer. You'll probably have to take the initiative, as most card issuers won't automatically lower your APR out of the goodness of their hearts. When you call to negotiate a better APR, it could help to have some competitor offers handy as a bargaining tool.