What Does APR Mean?

APR is an abbreviation for Annual Percentage Rate. Let’s explore…

Updated: May 18, 2024
Matt Crabtree

Written By

Matt Crabtree

Jason Mountford

Edited By

Jason Mountford

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The term Annual Percentage Rate is abbreviated APR. It's the yearly rate at which you'll be charged to borrow money, including both interest charges and fees.

A Representative APR has very specific, legal guidelines, and one of those is that at least 51% of customers who apply for a given product will qualify for the APR being offered.

The amount you pay is based on your own creditworthiness, but it gives a good indication of the real rate you might pay. If you are approved for a credit card or loan, the APR will be communicated to you at that time.

How do banks calculate APR?

When you borrow money, the total cost of the loan is expressed as an annual percentage rate, or APR. Fees and charges are included in order to provide an accurate comparison, and as mentioned, the APR rate (or better) has to be offered to at least 51% of customers.

This ensures you’re getting a realistic view of the total cost of the loan, not just a ‘best case scenario’ which very few borrowers will qualify for.

If your credit card has a high APR, then any balance you carry from month to month will incur a larger interest charge.

It makes financial sense to strive to pay off your debt as quickly as possible, whether you are able to do so because of careful budgeting and saving, an unexpected inheritance, or a lottery win. Since we can't predict the future, it's prudent to secure one's financial future while times are good.

Example of APR…

An illustration is the easiest way to describe the operation of APR:

If you borrow £1,000 on a credit card with a 12-per cent annual percentage rate (APR) and don't pay it back for a whole year, you'll have to pay £120 in interest.

The APR is charged to your balance on a monthly basis. Monthly interest is calculated by dividing the annual percentage rate by 12. A 12-per cent annual percentage rate equates to a 1% monthly rate. Interest on overdue balances of £1000 is calculated at £10 per month.

The smaller your monthly payment, the more interest you will pay because of stretching out your payments over a longer period of time.

Representative APRs — not just interest

What does an average annual percentage rate (APR) look like?

While a representative APR is always expressed as a percentage, that doesn’t mean it only considers interest costs.

As mentioned above, a representative APR is designed to show potential borrowers the overall cost of a loan, so that they can accurately compare between others in the market.

Let’s look at an example:

Credit Card A
Interest rate: 12%
Annual Fee: £100

Credit Card B
Interest Rate 15%
Annual Fee: £0

If only looking at interest costs, then Credit Card A looks like a better deal. However, if you take the fee into account, the scores even up.

Based on a balance of £1,000, these are the representative APRs for each card:

Credit Card A: 22%

Credit Card B: 15%

So as you can see, in this case Credit Card B is actually a better deal. It’s why representative APRs are so valuable, because it means you can quickly see the overall cost of the loan or credit card.

Learn how your credit score affects your interest rate by reading our in-depth guide on credit scoring.

Reducing APR

In what ways may I reduce the cost of a loan?

You'll need a good credit history to qualify for the greatest annual percentage rate (APR) offer. You will not know your actual annual percentage rate (APR) until after you apply and are informed that you have been approved.

The lower the risk you exhibit to a lender by promptly repaying any money you borrow, the higher your credit rating will be. Customers who are deemed a greater risk by the lender are subject to a higher annual percentage rate.

Applying for a credit card with a bad credit history

If I have a terrible credit history, where do I go to apply for a credit card?

If you are just starting out or have a low credit score, a credit builder card might be a good option.

If you borrow responsibly (Top UK Savings Apps) and make your monthly payments on time, you may avoid incurring interest and boost your credit score. If your credit history has improved, you may want to switch to a card with a more favourable interest rate.

Why should I avoid applying for too many lines of credit at once?

For what reasons should I avoid applying for many lines of credit at once?

Loan companies routinely analyse applicants' credit histories whenever new loans are requested. Your credit report will be affected. Applying for credit many times might give the impression that you are desperate. Applying for many forms of credit at once is a bad idea.

You may need to fulfil additional requirements and have a particular credit score in order to qualify for the representative APR. It's important to read the fine print to find out exactly what you're eligible for under the terms and conditions.

Before applying for credit, it's a good idea to check your credit record. If you want access to the best credit interest rates, you may need to work on it. If you have a good credit history, you may be eligible for promotional APRs and special discount rates.

So if you want to save money on interest, working on your credit is a wonderful first step.


So what ranks as a decent or low APR?

After the introductory 0% APR term expires, many 0% purchase credit cards will charge an annual percentage rate of 21% to 23%.

Credit cards with interest rates lower than the industry average of 21% are a good deal, while rates exceeding 24% are considered high. 

If you can pay off the full amount every month, you can disregard the APR because you won’t be paying any interest. However, the interest charges will accumulate if you neglect to pay it off and your APR is too high.

Credit cards for those with poor credit or who are just starting to establish credit may have interest rates anywhere from 24% to 50% APR. Avoid these exorbitant interest rates by paying off your credit card balance in full as soon as possible if you must use one.

Premium credit cards that provide substantial cash-back bonuses can have sky-high annual percentage rates, so make sure you’re checking the fine print to make sure the card will work for you.

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