How a card's introductory APR works


Opening Credits
Columnist Erica Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

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Dear Opening Credits,
What does it mean when they offer 0 percent intro for 14 months on purchases, then 10.99-22.99 percent standard variable purchase APR applies?  -- Sherril


Dear Sherril,
Translation: If you get this card, you will not be charged any interest for 14 months on items you buy with it, as long as you pay in full before the introductory period ends. If there is a balance left over, the issuer will begin to charge interest on that amount, which may be anywhere between 10.99 and 22.99 percent.

Still confused? I get that. Although "read the terms of the credit card account agreement before applying" is the general advice, it's not always easy. If you don't know what the terms mean and why a credit issuer may do certain things, it may as well be written in hieroglyphics.

So here is a breakdown of those terms and others you may encounter when trying to determine if a particular credit card is right for you.

APR. This is the amount of interest that the issuer will add to the balance on revolving debt, known as the annual percentage rate. The higher the interest rate, the higher the charge will be. Conversely, lower APRs will translate into less money being added to whatever debt you don't pay off by the due date. Your credit rating determines the APR you'll be eligible for. For those with excellent credit, you will most likely get the lowest interest rate of 10.99 percent. If your credit isn't so great, you may be approved for the card with a 22.99 percent APR.

Fixed APR. This is when the APR is not tied to an index rate -- usually the U.S. prime rate -- so it doesn't fluctuate.

Variable APR. If the APR is variable, it does change when the prime rate is changed. The prime rate is the interest rate 3 percentage points above the federal funds rate set by the Federal Reserve, so when you read a headline that says "Fed changes rates," it will mean your credit card's interest rate just changed. On the application, it will read something like: "prime plus 6 percent." The current prime rate is 3.25 percent.  The prime rate hasn't changed since 2008, but it is expected to rise later this year. Most credit cards today are variable rate cards.

Intro period. This is the APR that the issuer will charge new cardholders on balances for a specific time period. It can be 0 percent, as the application you are holding states, or simply less than what is considered a more normal rate.

Caveats. The application won't actually include the word "caveat," but if you were to read the entire form, you will probably see that the introductory period APR will end early if you pay late. This is very important to know, because a fantastic deal can turn into a rotten one overnight. You think you have a year-and-a-half to pay for a $5,000 sofa with no interest, but miss a billing cycle and suddenly interest starts being added -- at a rate that is highly unattractive.

In a nutshell, if you plan on rolling over balances with the card, you will want the interest rate to be as low as possible for as long as possible. However, if you always pay in full, which I recommend, the APR can be 1 million percent and it would have no impact on you. Send the complete balance owed by the due date and the loan will be free.

See related: Don't confuse introductory rate, deferred-interest deals

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Published: January 28, 2015

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Updated: 10-26-2016

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