How do credit card companies determine their APRs?

Credit card companies determine their APRs based on creditworthiness, or how much risk you pose as a borrower, as well as broader factors like the health of the economy. Creditworthiness is based on criteria such as an applicant’s credit history, income and total debt owed. Other considerations include age, monthly housing payments and employment status. So if a credit card company advertises a card’s APR as a range – 15% to 25%, for example – those are the main things that will determine the exact APR each approved applicant receives. There are also a number of factors that affect how issuers set their ranges, including the rates at which banks lend to their most creditworthy customers, the Federal Reserve’s target rate and more.

How credit card companies determine their APRs:

• Creditworthiness is the main factor. Cards offered to people with good or excellent credit usually have lower APRs than cards available to people with less-established credit.
• Most credit card APRs are advertised as a range. When you get approved for a credit card, the issuer will determine what APR to assign based on your credit history, income, debt and more.
• Most credit card companies determine their APRs by adding a designated number of percentage points to the prime rate, as published by The Wall Street Journal.
• Credit card APRs are indirectly determined by the strength of the economy. During downturns, 0% credit card offers tend to disappear. And the average credit card APR is closely tied to the Federal Reserve’s target rate.
• Credit card APRs usually are variable but can be fixed in some cases. A fixed APR does not fluctuate with changes to an index such as the prime rate. A variable APR changes as the prime rate or other index changes.
• If you don’t carry a balance from month to month, you won’t pay any interest. But if you don’t pay in full by your due date (or by the due date following your 0% introductory period), you will owe interest on the remaining balance after that day. You will also owe interest right away on cash advances. On balance transfers, interest accrues right away or after any 0% introductory APR ends.
• Credit card interest compounds daily. Each day that you have a balance, more interest is added. And you pay interest on both the original balance and all previous interest.

You can see your interest rate on your credit card statement, listed under APR. But your statement will include several APRs other than the rate for standard purchases. Expect to see annualized rates for balance transfers and for cash advances. There may also be a penalty APR, a rate you’re charged if don’t make at least the minimum payment by the due date. Credit card issuers can change your APR for pretty much any reason once your account has been open for at least 12 months. But if they do, they’re required to let you know 45 days in advance and the rate increase can only apply to purchases made 14 days after the notice was sent.

If you’re wondering how much interest you’ll pay each month, you’ll need to know the Daily Periodic Rate (DPR). Divide the APR by 365, the number of days in a year. Multiply that figure by the number of days in the billing cycle. You can also use WalletHub’s credit card interest calculator.