Does APR matter if you pay your credit card off on time?

PhotoAlto/Frederic Cirou/GettyImages; Illustration by Hunter Newton/Bankrate

When it comes to managing your credit cards, your annual percentage rate — or APR — is among the most important factors to consider, especially if you plan to carry a balance each month. This is because an APR determines how much it’s going to cost you to borrow money on your card. And with the average credit card interest rate passing 20.7 percent, credit cards are one of the most expensive ways to borrow money these days.

If you never carry a balance on your credit card, your APR might just be a number on your bill. But if you’re among the 47 percent of cardholders who carry debt from month to month, according to Bankrate survey data, it can be the difference between staying on top of your finances or slipping into debt.

Your APR matters if you don’t pay your balance in full every month

If you carry a credit card balance, your card’s APR is critical. When you don’t pay off your statement balance in full, your lender charges you interest on any remaining balance. And credit card interest compounds daily — which means interest accrues each day, effectively charging you interest on your interest. This can lead to debt disaster if you continuously carry a balance from month to month.

Let’s say you have a credit card with an APR of 20 percent. If you have a $1,200 balance and you pay only your statement’s $45 minimum due each month, it could take you 36 months — or three years — to pay off that one balance. And you’ll pay about $400 in interest for the privilege, according to Bankrate’s credit card payoff calculator.

If you know you’ll need to carry a balance on your credit card, consider these two strategies to stay out of debt trouble:

• Always make the minimum payment. There may come a time when you simply can’t pay your balance in full, but always aim to make at least the minimum payment. This is the lowest amount you can pay each month while remaining in good standing with your issuer. By paying at least your statement’s minimum, you can avoid late fees, penalty APRs and a negative mark on your credit report. Note that your issuer will still charge interest on any remaining balance.

• Always pay on time. Payment history makes up 35 percent of your FICO credit score, making it the most important factor when calculating your credit score. Late payments can linger on your credit report for the next seven years. Missing a payment by a day or two is not usually a crisis — some lenders won’t report a missed payment until it is at least 30 days late. You may still pay a late fee, though if it’s a rare occasion, your issuer may be willing to waive that fee with a phone call.

Your APR doesn’t matter if you pay off your balance each month, thanks to your grace period

The Credit CARD Act of 2009 requires lenders to deliver your bill to you at least 21 days in advance of when it’s due. During this time, most lenders offer an interest-free grace period.  Most card issuers charge no interest on purchases from the time you tap or swipe your card and all the way through the due date on your bill — assuming you aren’t already carrying a balance from the prior statement cycle.

Here are some things to keep in mind:

• Most major credit card issuers offer an interest-free grace period, but they aren’t required to. You must read your credit card’s fine print or talk to a customer representative to confirm that your lender does offer this benefit. In the Schumer box of your card agreement — that’s the chart full of rates and fees at the top of your document — you should see a section that says something like “How to avoid paying interest on purchases.”
• Interest starts accruing when the grace period ends. Assuming you enjoy the typical interest-free grace period on purchases, know that when it ends, any remaining unpaid balance will accrue interest. If you pay your balance in full and you’re only using your card for purchases, you’re generally in the clear.
• You can enjoy a grace period each billing cycle as long as you pay your balance in full. If you have a grace period and pay off your balance by the due date, that grace period continues and you’re able to make new purchases with your credit card without paying interest. A card issuer can – and usually does – revoke an interest free grace period for at least a billing cycle or two after you’ve carried a balance.

If you consistently pay your credit card purchases off each month, it doesn’t matter whether your credit card charges an interest rate of 10 percent or 25 percent. You aren’t carrying a balance on those purchases, so your issuer won’t charge you interest. Still, you should have some idea what your card’s interest rate is so you’re prepared in the event you unexpectedly find yourself carrying a balance one month.

Your interest rate is critical with cash advances and balance transfers

A cash advance is a type of loan that allows you to withdraw money at an ATM or bank through your credit card, while a balance transfer is a way to move debt from one credit card to another. Knowing the APRs associated with these types of transactions is especially important. Here’s why:

Cash advances

When you need money in a hurry, you might be inclined to take out a cash advance on your credit card.  Cash advances typically don’t come with a grace period, which means the money you’re advanced attracts interest from the time you take out the loan. Cash advances also come with steeper interest rates than purchases, as well as a cash advance fee. That in mind, it’s critical to understand the cash advance rate and fee you face by taking out this type of loan.

Balance transfers

Balance transfers are another transaction in which it’s useful to be aware of your card’s interest rate. The best balance transfer cards often feature a promotional 0 percent interest rate for a fixed period of time. If you are currently taking advantage of a 0 percent intro APR offer, the interest rate doesn’t affect you until your introductory period expires — unless you fail to make your minimum payment, after which you may be subject to a penalty APR on your transferred amount.

Otherwise, your interest rate only increases to the regular rate if you haven’t paid off your balance transfer amount by the time the promotional period ends. Read your balance transfer card’s fine print to understand both your regular APR that kicks in after the promotional period and the potential penalty APR and fees if you miss a payment.

Finally, if you make a balance transfer outside of your card’s introductory period, you’ll begin paying interest on the transferred amount as soon as it hits your account balance.

What to consider if you need to carry a balance

Not paying your balance in full can negatively affect your finances. This can happen any month in which your spending outpaces your income, whether you overspend or something unexpected, such as a medical emergency, throws a wrench in your budget.

But at the end of the day, life happens, and sometimes we just need a way to rebound. To help you stay on top of your credit card balance, keep the following tips in mind:

• Don’t ignore the fine print. Even low interest rates come with terms and conditions, so be sure to review your card’s fine print. For example, find out when your card issuer could raise your interest rate, which could make it more difficult to pay off your balance.
• Consider your budget. If you need to carry a balance, try to keep it within your comfort level. It’s better to be conservative. If you can’t pay it off in a few months, consider how your debt will affect your finances if the interest continues to accrue.
• Consider your credit score. Your credit score is another factor to consider before carrying a balance. Payment history and amounts owed are two of the most important factors when it comes to calculating your credit score. If you can’t pay off your credit card debt and your balance gets out of control, your credit score will suffer.

The bottom line

If you pay off your purchases in full by your card’s due date and your issuer offers an interest-free grace period on purchases, you can largely ignore your credit card’s APR. However, if you do end up carrying a balance, completing a cash advance or making a balance transfer outside of a promotional period, those pesky percentages can add up quickly.

If you’re navigating credit card debt and aren’t sure where to go from here, consider using Bankrate’s credit card payoff calculator to determine how many months it might take to become debt free.