What APR means on your credit cards and loans

When it comes to comparing a credit card or loan offer, APR is key. (iStock)

If you’re shopping around for a loan, credit card or mortgage, then understanding APR is critical—at least if you want to make the most of your money.

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APR stands for annual percentage rate and, like your interest rate, it reflects how much borrowing money will cost you. The only difference? APR includes all the fees, too.

What’s in an APR?

Put simply, the APR reflects the total, annual cost of a credit card or loan—including the interest you’ll pay, the origination fees, and any other fees your lender charges for borrowing the cash.

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APRs vary slightly by financial product. Thanks to their defined terms, mortgages and loans have easier-to-calculate (and also more accurate) APRs. Credit cards, which have more open-ended terms, are a little trickier, as your balance can change and, thus, so can the amount of interest you pay.

Still, APR can give you a good barometer with which to assess and compare loan/credit card offers.

Your lender or credit card company should tell you the estimated APR for any product you’re considering (it’s actually required on a mortgage loan estimate). You can also usually find it on your monthly statements, as well as your original agreement or contract.

Types of APRs

APRs aren’t always cut and dry. Though many loans come with fixed APRs, meaning the fees and interest you’re charged are set in stone, that’s not true of all products. In some cases, you may have what’s called a variable rate APR. These are tied to an index rate and can rise and fall based on market conditions.

Credit card APRs are also unique. Because interest compounds on credit cards, APRs aren’t always the most accurate gauge of how much a card will cost you—unless you plan to pay off your balance every month. There are also usually several different APRs for any given card, including one for:

  • An introductory period
  • Purchases
  • Balance transfers
  • Penalties
  • Cash Advances

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A quick note here: APR shouldn’t be confused with APY—or annual percentage yield. While APR is what you’ll pay to take out money, APY is the amount you’ll earn on a savings account or other interest-earning product.

Why APR matters—and how to lower yours

It’s important to know the APR when evaluating any credit card or loan offer, as it can help you estimate your total costs, as well as assess how the loan fits into your overall household budget.

When you’re looking to take out a loan or credit card, the best thing you can do is shop around. Rates can diverge greatly from lender to lender, as can fees and penalties. By looking at the APR of each offer you receive, you can more accurately compare the long-term costs of each loan you’re considering.

Finally, keep in mind that your interest rate will play a big role in your APR. If you can lower that (by improving your credit, paying discount points, putting down a larger down payment, etc.), then your APR will fall in step.

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