APR vs. Interest Rate on Credit Cards: What’s the Difference?

Key insights:

• An interest rate represents the base cost of borrowing money from a lender
• An APR includes the interest rate along with additional fees associated with a financial product
• The APR and interest rate are typically the same on a credit card

Understanding the differences can help you make informed choices when exploring different financial products.

If you’re applying for a credit card or personal loan for the first time, you may find the differences between the annual percentage rate (APR) and the interest rate confusing. The good news is that, on credit cards, APR and interest rate are often one and the same. However, the relationship between the two can vary with other lending products, so it’s important to understand the distinction.

Let’s take a look at the key differences between an APR and an interest rate, as well as other borrowing costs.

APR vs. interest rate: key differences

The APR and interest rate are often the same on credit cards, but not on other financial products like personal loans. This variation occurs because loans and mortgages often include additional fees that are bundled into the APR.

Here’s a quick glance at the main differences between an APR and an interest rate:

What is an interest rate?

Simply put, an interest rate is the amount a lender charges you to borrow money. It’s expressed as a percentage of the principal loan amount, or the credit card balance you carry. The higher the interest rate, the more you pay to borrow those funds.

What is an APR?

An annual percentage rate (APR) represents the broader cost of borrowing money over the course of a year. It includes the base interest rate plus certain fees the lender requires you to pay to obtain the loan or credit line. Depending on the financial product, APR may include:

• Interest
• Origination fees
• Closing costs
• Administrative fees

In short, the interest rate tells you how much you will pay to carry a balance, while the APR gives you a fuller picture of the overall cost.

How an APR works

Lenders calculate interest rates based on the principal amount you owe. On a personal loan, the interest rate applies to the total loan amount you finance. For credit cards, however, the process works a bit differently: issuers generally charge interest on the unpaid balance past your payment due date.

Some issuers calculate credit card interest on your average daily balance: they divide the annual interest rate by 365, then multiply the result by the number of days in your billing period and your current balance.

For example, if your billing period is 30 days and your credit card charges a 15% interest rate, an unpaid credit card balance of $1,000 may incur an additional $12 in interest.

Explore low intro APR credit cards with Citi

Now, when you look at an APR vs. interest rate on a credit card, you’ll understand why they’re usually identical. This can make your monthly payments more predictable when you apply for a credit card compared to other lending products.

Another perk is that many credit card issuers, including Citi, may offer a low introductory APR on certain credit cards for a set period after you open the account. This can help you save money on interest charges if you’re looking to cover a large purchase or transfer a balance from another card.

Explore Citi credit cards today to find an option that aligns with your financial goals.

APR vs. interest rate FAQs

Why is APR higher than the interest rate?

The APR is higher than the interest rate on many financial products because it includes the interest rate plus additional fees, such as origination costs. By rolling these fees into the calculation, the APR reflects a more complete yearly cost of borrowing. On credit cards, however, the APR and interest rate are usually the same.

Should I go by the APR or the interest rate?

Many people choose to look at the APR when comparing financial products like personal loans because it provides a more comprehensive view of the total borrowing cost. Focusing on the APR can help you see the impact of extra fees. When evaluating credit cards, you can rely on the APR, as it usually represents the interest rate.

What does 7% APR mean?

A 7% APR means that the total cost of borrowing over 1 year, including interest and applicable fees, equals 7% of the loan amount. If this is a credit card APR, it means the interest rate applied to your balances is 7%. This percentage helps you calculate the charges you will incur if you carry a balance.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.