If you’ve ever owned a credit card before, chances are you’re familiar with the term “APR,” or annual percentage rate. For specifically credit cards, your purchase APR is essentially your interest rate, or the cost of borrowing money. But for those cardholders who pay their balance off on time and in full every month, their APR really doesn’t matter.
Let’s see how managing your credit card payments can help you avoid interest entirely.
How do APRs work?
Credit cards often have a few different types of APRs, but purchase APR is what many people are referring to when they talk about a credit card’s interest rate. Purchase APR is essentially how much it costs to borrow money, which is what you’re doing each time you use your card.
For any borrowed funds that you don’t pay back on time, your bank will charge you interest on the amount that remains unpaid. For example, if you had an unpaid statement balance of $1,000 on a card with a 20% APR, you would be charged an additional $16.57 in interest for that one billing cycle. You can see how credit card balances quickly balloon the longer they go unpaid.
To find your card’s APR, look at your monthly billing statement or contact your card issuer.
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Does APR matter if I pay on time?
Your purchase APR doesn’t really matter if you pay your statement balance on time and in full. Many credit cards have a grace period, which is the time between when your billing cycle ends and when your payment is due. Since credit cards only charge interest on outstanding balances, if you pay off everything you bought with your card for that period, you won’t owe any interest. While grace periods are not required to be offered by cards, if they are, they must be for a minimum of 21 days.
Paying off your card’s balance on time and in full each month isn’t just a good financial habit that can save you money on interest, but it also means you’re maximizing the value you get from rewards.
Let’s look at a card like the Capital One Venture Rewards Credit Card, which comes with 5X miles on hotels, vacation rentals and rental cars booked through Capital One Travel and no foreign transaction fees. If you pay off your card’s balance each month, you’ll avoid the nearly 30% APR on purchases and balance transfers (!) and it also makes perks like an up to $120 credit for Global Entry or TSA PreCheck that much more valuable. It’s a real $120 credit; if you were also paying interest on a balance, it effectively cancels out, or subtracts from, that credit you’re getting.
The Capital One Venture Rewards Credit Card has a reasonable annual fee and earns flexible travel rewards, which makes it a great travel card for beginners or heavy travelers.
- Valuable welcome offer worth at least $750 in travel
- You can transfer miles to over 15 Capital One partners, including Emirates Skywards, Choice Privileges and Singapore Airlines KrisFlyer
- No foreign transaction fees
- Lacks ongoing travel benefits such as statement credits or lounge access
- Limited bonus spending category that only applies to certain Capital One Travel bookings
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select’s editorial staff.
- Enjoy a one-time bonus of 75,000 miles once you spend $4,000 on purchases within 3 months from account opening, equal to $750 in travel
- Earn unlimited 2X miles on every purchase, every day
- Earn 5X miles on hotels, vacation rentals and rental cars booked through Capital One Travel, where you’ll get Capital One’s best prices on thousands of trip options
- Miles won’t expire for the life of the account and there’s no limit to how many you can earn
- Receive up to a $120 credit for Global Entry or TSA PreCheck®
- Use your miles to get reimbursed for any travel purchase—or redeem by booking a trip through Capital One Travel
- Enjoy a $50 experience credit and other premium benefits with every hotel and vacation rental booked from the Lifestyle Collection
- Transfer your miles to your choice of 15+ travel loyalty programs
Balance transfer fee
$0Â at the Transfer APR, 4% of the amount of each transferred balance that posts to your account at a promotional APR that Capital One may offer to you
Foreign transaction fee
We can apply the same thought process to a cash-rewards card like the Wells Fargo Active Cash® Card. With this credit card, you can earn a flat-rate 2% unlimited cash rewards on purchases while paying no annual fee. If you use this card and pay your bill on time and in full each month, you’re essentially getting 2% cash rewards of what you spend back to you for no extra fees.
The Wells Fargo Active Cash® Card is great if you want simplicity thanks to its flat-rate 2% unlimited cash rewards on purchases and $0 annual fee.
- High flat-rate return on purchases
- Intro-APR for purchases and qualifying balance transfers for a year
- No annual fee
- Cell phone protection
- Has a foreign transaction fee
- Limited redemption options unless you pair it with a Wells Fargo card that allows point transfers
Highlights
Highlights shown here are provided by the issuer and have not been reviewed by CNBC Select’s editorial staff.
- Select Learn More to take advantage of this offer and learn more about product features, terms and conditions.
- Earn a $200 cash rewards bonus after spending $500 in purchases in the first 3 months.
- Earn unlimited 2% cash rewards on purchases.
- 0% intro APR for 12Â months from account opening on purchases and qualifying balance transfers. 19.24%, 24.24%, or 29.24% Variable APR thereafter; balance transfers made within 120 days qualify for the intro rate and fee of 3% then a BT fee of up to 5%, min: $5.
- $0 annual fee.
- No categories to track or remember and cash rewards don’t expire as long as your account remains open.
- Find tickets to top sports and entertainment events, book travel, make dinner reservations and more with your complimentary 24/7 Visa Signature® Concierge.
- Up to $600 of cell phone protection against damage or theft. Subject to a $25 deductible.
Balance Transfer Fee
Intro balance transfer fee of 3% for 120 days from account opening, then up to 5%, min: $5
Foreign Transaction Fee
Remember that rewards and welcome bonuses on new credit cards are really most valuable when you pay your credit card on time and in full every month.
What if I need to carry a balance?
If you find yourself carrying credit card balances month to month, it’s something you should address ASAP. It’s likely that your credit card’s APR is the highest interest rate you’re being charged out of all your debts so it should be prioritized. Cut out other spending, like monthly subscriptions, until that balance is paid off entirely.
The Citi Simplicity® Card may not earn rewards, but it can still save you money due to its amazing intro-APR offers.
- One of the longest intro-APR offers for balance transfers
- No annual fee
- No rewards
- No welcome bonus
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
