Demystifying Credit Card APRs: Everything You Need To Know

Posted on Thursday, August 24th, 2023 | By IndusInd Bank

Credit cards can help you manage your expenses, earn rewards, and build your credit score. However, credit cards also come with certain costs that you need to be aware of before using them. One of the most critical costs is the APR, or Annual Percentage Rate, which is the interest rate that you must pay on your outstanding balance if you do not pay your bill in full by the due date. In this blog, we will help you understand what credit card APRs are, how they are calculated, and how they affect your credit card bill.  

What is a credit card APR? 

APR is the interest rate that is charged on your credit card balance if you do not pay it off in full every month. It is expressed as a yearly percentage and it represents the total cost of borrowing money from your credit card issuer. For example, if your credit card has an APR of 24%, that means you will have to pay 24% interest on your balance over a year. 

However, most credit card APRs are usually calculated on a daily basis, not on a yearly basis. This means that your interest rates will vary depending on how much you owe and how long you carry a balance. To find out your Daily Periodic Rate (DPR), which is the interest rate that is applied to your balance every day, you need to divide your APR by 365 (the number of days in a year). For example, if your APR is 24%, your DPR will be 

24/365 =0.0658% 

To calculate how much interest you will pay in a month, you need to multiply your DPR by the number of days in the billing cycle and by the Average Daily Balance (ADB), which is the sum of your balances at the end of each day divided by the number of days in the billing cycle. For example, if your DPR is 0.0658%, your billing cycle is 30 days, and your ADB is ₹10,000, your interest charge will be 

0.0658%×30×₹10,000 = ₹197.4 

What are the types of credit card APRs? 

Not all credit card APRs are the same. Depending on the type of transaction or the situation, you may be charged different APRs on your credit card. Some of the common types of credit card APRs are: 

• Purchase APR: This is the most common type of APR that applies to your regular purchases made with your credit card which is calculated if it’s not fully paid for before the end of the grace period. The grace period is the period of time from the end of your billing cycle to the day on which your bill is due.   
   
• Cash Advance APR: This is the type of APR that applies when you use your credit card to withdraw cash from an ATM or a bank branch. It is usually higher than the purchase APR and it may also incur additional fees such as cash advance fees or ATM fees. Most credit cards do not offer any grace period, which means that you will start accruing interest from the day you withdraw cash until you pay it back in full. 
   
• Balance Transfer APR: This is the type of APR that applies when you transfer your existing credit card balance from one card to another. It may be lower than the purchase APR, but it may also incur a balance transfer fee, which is usually a percentage of the transferred amount. 
   

• Introductory or Promotional APR: This is a special type of APR that applies for a limited period of time when you open a new credit card account or take advantage of a special offer from your credit card issuer. It may be lower than the regular purchase APR or even zero for a certain number of months, but it will revert to the normal rate after the introductory period ends. 
   
• Penalty or Default APR: This is the highest type of APR that applies when you violate the terms and conditions of your credit card agreement, such as making late payments, exceeding your credit limit, or defaulting on your debt. It may apply to your entire balance or future transactions until you restore your account to good standing. 

How can you avoid paying credit card APRs? 

The best way to avoid paying credit card APRs is to pay your bill in full every month by the due date. This way, you can enjoy an interest-free grace period, which is the time between the end of your billing cycle and the due date, during which you can pay your balance without incurring any interest charges. However, if you cannot pay your bill in full, you should at least pay the minimum amount due, which is the lowest amount that you have to pay to avoid late fees and penalty APRs. You should also try to pay more than the minimum amount due whenever possible, as this will help you reduce your interest charges and pay off your debt faster. 

Another way to avoid paying credit card APRs is to choose a credit card that suits your needs and preferences. You should compare different credit cards based on their features, benefits, fees, and APRs and select the one that offers the best value for your spending habits and repayment capacity. You should also look for credit cards that offer low or zero APRs on certain transactions or for a limited period of time, such as balance transfers or introductory offers. However, you should also be aware of the terms and conditions of these offers and make sure that you can pay off your balance before the offer expires. 

Conclusion 

Credit card APRs are important costs that you need to consider before using your credit card. They are the interest rates that are charged on your credit card balance if you do not pay it off in full every month. They may vary depending on the type of transaction or the situation and they may affect your credit card bill significantly. Remember, you can avoid paying credit card APRs by paying your bill in full every month by the due date. IndusInd Bank offers a range of credit cards that offer lifetime free cards, flexible reward plans, and exclusive benefits across various categories. You can apply for IndusInd Bank credit cards online instantly and enjoy a seamless and rewarding payment experience. 

Apply Now 

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.