What is Annual Percentage Rate (APR) and how does it work?

What is Annual Percentage Rate (APR)?

If you're applying for a loan or credit card, you're likely to see the term APR everywhere, so it's important that you understand what it means.

APR stands for Annual Percentage Rate and it refers to the yearly cost of borrowing money. APR factors in how much interest you will have to pay, as well as any standard fees, helping you compare the cost of borrowing money from lenders.

Learn more about how credit cards work.

When do I pay APR?

APR is calculated on a yearly basis, but it's added to your bill monthly. If you pay your credit card bill in full and on time, then you won't have to pay any interest on your purchases. It's only when you carry a balance over into a new month that you will have to pay interest based on your credit card's APR.

How does APR work?

APR is expressed as a percentage rate, and shows you the true cost of borrowing on your credit card. This rate includes interest and standard fees, so it offers a more complete picture of how much the money you borrow will cost to pay back.

APR only includes compulsory charges – it does not cover any fees for being late with payments or going over your credit limit.

Different types of APR

Representative APR

Lenders offer different rates of APR depending on people's personal circumstances, but when you first start searching for a product you'll typically see the representative APR. This is the rate that at least 51% of those accepted for the credit deal will get on any given product. However, that does mean that almost half the people who are approved for the deal may not be eligible for the advertised rate and will get a different rate – usually a higher one.

For standard credit cards, representative APR is based on a credit limit of £1,200 – this is the same for all lenders. Representative APR assumes you spend the full £1,200 on the first day and then pay it back in equal, regular instalments over a year without spending anything else.

Personal APR

Personal APR is worked out based on your personal circumstances, including credit history and finances, as well as the loan amount and length of your borrowing. Personal APR could be more than the advertised representative APR.

Variable APR

It's common for credit cards to have Variable APR. This means that the APR isn't fixed, and can change over time. So, the amount of interest you are charged each month will vary depended on the APR at that time.

There are lots of reasons your APR might change, though it will usually be to stay in line with the Bank of England interest rate.

Example of credit card APR

Let's say your credit card has a standard APR of 23.9%. If you borrow £1,000 and don't pay any of it back, it will cost you £239 in interest over the year.

The amount of interest you pay on your purchases is directly related to how much you have outstanding in credit month-by-month, so it's a little more complicated than this in practice. This example also doesn't include any other fees, or variable rates. But hopefully it gives you a general idea of how APR works.

Check out the APR on M&S Credit Cards, as well as the benefits of our credit card offers.

Published December 2022