The annual percentage rate (APR) applied to your credit card accounts is a calculation of the cost of credit. 
All credit card companies are required to fully disclose the APR in the credit card agreement, and every lender not only calculates the APR in a different way, but may also apply a different APR for purchases or cash advances on your account. When you’re comparing credit card offers and want to make the most informed financial decisions about your credit, it’s important to understand how APR is calculated, and what the difference is between variable and fixed APR.
How APR is Calculated for Credit Cards
The APR is calculated as the rate for the payment period, multiplied by the number of payment periods over the year. For example, if your credit card provider has stated a 20% APR, then your periodic rate would be 20% divided by 12 months, or about 1.67% per month. This periodic rate is applied to the monthly balance on the credit card. Every credit card company uses a different method to determine what balance to use when charging the periodic rate.
Some credit card companies will charge the periodic rate to an adjusted balance, a previous balance, an average daily balance, or an ending balance. Others may charge the periodic rate on a two-cycle average daily balance. Understanding how the company charges the periodic rate can help you decide which card really has the best terms.
Variable vs. Fixed APR
APRs on credit cards can either be variable or fixed. A variable APR is calculated by adding a marginal rate to a reference rate, such as the U.S. Prime Rate. In this case, whenever the Prime Rate changes, the variable APR rate also changes. Each credit card company will then adjust your APR on a monthly or quarterly basis. The methodology for charging the APR rate will be listed in your credit card agreement.
It’s important to understand what the difference is between variable and fixed APR. If misread, credit card deals can quickly become credit card traps.
Fixed APRs do not take any type of reference rate into account, so your account balance will be charged the same amount in every period. While fixed APRs are a little more stable than variable APRs, they can still change when the credit card company decides to adjust their rate. All credit card companies are required by law to notify consumers that they are changing the fixed APR rate.
Understanding how APR is calculated and what type of APR is charged to your account balance can help you make the best decisions when comparing credit card companies. Take the time to review your credit card agreement so that you can make the most informed financial decisions.
