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Credit cards are one of the most expensive ways to borrow money. Thats because credit card interest rates can be very high — sometimes 30% a year or more. However, you can have a credit card with the highest annual percentage rate in the world and never pay interest if you’re frugal with your purchases.
The short answer is no, as long as you pay your credit card balance in full each month. However, understanding APR and how it impacts your credit score is essential for avoiding credit card debt.
What is APR?
APR stands for Annual Percentage Rate. It’s the interest rate that your credit card issuer assesses on the amount that is still due. The higher the APR, the more interest you’ll pay on your debt.
How does APR affect your credit score?
Lenders utilize your credit score, which is a three-digit figure, to determine your creditworthiness. It depends on a number of variables, such as the length of your credit history, your credit utilization ratio, and your payment history.
Your credit utilization ratio is the percentage of your available credit that you’re using. A high credit utilization ratio can negatively impact your credit score. If you have a high APR and you’re carrying a balance on your credit card, your credit utilization ratio will be higher, which can hurt your credit score.
How to avoid credit card debt
Paying off your credit card debt in full each month is the best strategy to stay out of debt. This way, you won’t be charged any interest. Nevertheless, there are a few things you can do to reduce the amount of interest you pay if you are unable to pay off your balance in full:
- Make more than the minimum payment: Even if you can’t pay off your balance in full, making more than the minimum payment will help you pay down your debt faster and reduce the amount of interest you pay.
- Transfer your balance to a card with a lower APR: If you have a credit card with a high APR, you can transfer your balance to a card with a lower APR. This will save you money on interest charges.
- Use a credit card with a rewards program: If you’re going to carry a balance on your credit card, you might as well earn rewards for doing so. There are many credit cards that offer rewards programs, such as cash back or travel points.
APR is an important factor to consider when using credit cards. However, if you pay your balance in full each month, you won’t have to worry about it. By following the tips above, you can avoid credit card debt and improve your credit score.
Additional resources
- Credit Karma: What is APR?
- NerdWallet: How to Avoid Credit Card Debt
- Bankrate: How to Pay Off Credit Card Debt
Disclaimer: I am not a financial advisor, and this information should not be considered financial advice. Please consult with a qualified financial advisor before making any financial decisions.
If you don’t pay in full every month: APR matters a lot
If you carry a balance — meaning you dont pay in full — youll rack up interest charges. Every day that you carry a balance on your credit card contributes to the total amount of interest you pay each month because credit cards charge interest based on your average daily balance.
These daily balances can add up to a significant amount of interest over the course of a month, year, or five years if you carry a balance. Our interest calculator gives you a sense of how much it can cost you:
Two things to keep in mind:
It is imperative that you make the minimum payment on time, even if you are unable to pay the entire balance. If you dont, you’ll probably be charged a late fee, and your credit score could suffer. Stop paying entirely, even for a couple of months, and your card issuer might lower your credit limit. This creates a cascade effect. You miss payments, and your credit score suffers. When your credit limit is reduced, your balance appears larger than the amount of credit you have available, which further lowers your credit score.
So make your minimum payments at all costs. That signals to the card issuer that youre still here, and youre still taking responsibility for your debts.
Lets say the due date has come and gone. You made at least the minimum payment on time, so youre in good shape there. However, you don’t have to wait until the following due date to try again paying off your balance or making the full payment. You can pay off all or a portion of your debt with another payment as soon as you have the funds. Although interest will still be charged, it will be at a reduced rate because your monthly average daily balance will have decreased.
If you pay in full every month: APR doesn’t matter
Two things occur when you pay off your credit card debt in full and on time in a given month, rendering your interest rate meaningless:
- The card issuer cannot impose interest on a balance that has not been carried over.
- There is a grace period for purchases made in the upcoming month. This implies that until your subsequent statement due date, interest will not be charged on new purchases.
Your issuer will charge interest on any outstanding balance if you don’t pay it in full. In addition, interest can start accruing on new purchases from the day you make them.
Therefore, all you need to do to prevent interest charges is pay your bill in full each and every month by the deadline. Thats it. Dont carry a balance, and you wont pay interest.
Although it’s not mandated by law, reputable credit card issuers do provide a grace period for customers who make full payments. Some issuers that specialize in credit cards for bad credit dont offer a grace period. Its best to avoid these issuers products. If you have bad credit, see NerdWallets best credit cards for bad credit for better options.
Do you have to pay APR if you pay on time?
FAQ
Does APR apply if you pay on time?
Does APR go down if you pay early?
Does interest rate affect you if you pay on time?
Can you avoid APR by paying early?
Does credit card Apr matter if you don’t pay in full?
Even if you pay on time, credit card APR matters if you don’t pay in full. The average American household with a credit card carries nearly $8,400 in credit card debt — and credit card debt is risky to carry for two reasons. First, credit cards have compounding interest.
Does Apr matter if you pay in full every month?
If you pay in full every month, the APR doesn’t matter. However, if you do not pay in full every month, APR can make a significant difference. If you pay in full every month, your interest rate becomes irrelevant. By paying in full, you don’t have an outstanding balance on which your issuer can charge interest.
What does Apr mean on a credit card?
Your card’s annual percentage rate — or APR — is the interest rate on your credit card. If you pay off your monthly balance in full by each statement’s due date, you typically avoid paying interest on your purchases. If you do carry a balance, your issuer charges you interest on the balance until your statement is paid in full.
Do credit cards charge penalty APRS?
Some credit cards don’t charge penalty APRs, but many popular ones do. They could hike the interest rate if you’re two months late on payments. And the higher rate could last until you pay on time for six months straight.