Q:

How does annual percentage rate (APR) work?

A:

Quick Answer

The annual percentage rate, based largely on the credit score of the cardholder, is the interest rate on a credit card over a year. A credit card account may have different APRs, such as one for purchases and one for balance transfers. A credit card may have either a variable or non-variable APR; a variable APR is calculated by adding a number to a reference rate.

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Full Answer

A non-variable rate does not depend on a reference rate and is therefore more stable than a variable rate, but it may still change under certain circumstances. However, the credit card issuer must notify a cardholder before any changes in his non-variable rate are implemented. Credit card issuers may offer low promotional APRs that apply to specific transactions over a limited period so as to encourage users to spend. This APR may revert to a higher rate at the end of the promotion. Most credit card issuers allow a grace period of 30 days in which the cardholder has to pay the balance on his card before it starts to accrue interest. If the balance is not paid in full at the end of the grace period, the issuer begins to charge interest on the outstanding amount at the agreed APR.

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