Okay, before even answering that question, let’s first answer the real question at hand: What does APR even mean? APR stands for annual percentage rate. If you’re taking out a loan, the APR is a yearly rate charged for a loan. However, with a credit card, it’s the yearly rate charged for the money you’re borrowing via the credit card.
This means that, if you use credit on the card and owe a balance, you will be charged an APR, which is interest, on that amount. Now, most credit card companies don’t require you to pay that interest rate if you make the minimum monthly payment. However, for those who have the tendency to max out credit cards or miss monthly payments, APR can be brutal.
Here’s what to know about APR, why it matters, and how to understand what a good APR is for a credit card you’re looking at signing up for.
APR vs. APY
Let’s start with the basics. Most people get APR and APY confused. We get it; they’re only a letter different. However, they are, in fact, entirely different.
APY stands for annual percentage yield. And, it’s a term that applies more to checking and savings accounts. What it really does is indicate the total amount of interest you earn on a deposit account over one year (hence the term “annual”). While APY is based on the interest rate, APY gives you the most accurate idea of what you'll earn in a year.
This means that, if you really want to figure out how much a deposit will earn over the course of a year, you need to look at APY. Namely, because it also factors in compound interest.
Now, when it comes to APR vs. APY, it’s a bit easier to understand the difference, right? APR doesn’t tell you what you earned. Instead, it tells you what you’re due to pay (in certain cases). And, the biggest difference is that, as mentioned before, APR mostly applies to things like loans and credit cards.
What Does 0% APR Actually Mean?
If you’ve ever applied for a credit card then you’ve likely seen the “0% introductory APR” offer, right? That sounds attractive, but what does 0% APR mean?
When you see a 0% APR offer, it means that, during the specified period of time, you won’t be required to pay interest. Usually, this period is a year, but it can also be anywhere between six to 24 months. Credit card companies are required to notify you of the APR before you sign the contract and get issued the card, so be sure to first check the introductory APR rate and period and then understand what the subsequent APR will be once that introductory period is over.
During that period, you will still have to make payments on what you charge to your card (set up autopay to be sure you never miss a payment!). However, you won’t incur interest on any of those purchases or balance transfers (for the latter, definitely check with your card issuer to make sure that’s accurate, though).
What is a Good APR?
Average credit cards APRs in 2022 are currently about 14-16%, depending on where you’re getting your statistics and data from. While a great APR is obviously 0%, that’s not really feasible long-term, even with some of the best credit cards.
How is your APR determined? Traditionally, those with higher credit scores are offered lower APRs, and those with lower credit scores are offered higher APRs. This is why it’s so important to check, monitor, and work to improve your credit score.
Are Zero-Interest Credit Cards Worth It?
In short, yes! However, as mentioned, you traditionally only get charged interest if you fail to make the minimum monthly payment. It’s not that the credit card company is charging you 20% APR on your entire balance regardless of when you pay or what you owe. APR really only comes into play when you aren’t meeting the minimum monthly payment requirements.
So, in short, yes, zero-interest cards are worth it as they can help save you money in the long-run and in the case that you miss a few payments. However, if you pay on-time, keep your credit card balance low, and have a decent credit score, it’s not going to make much difference what your APR is.
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