Let’s start with the basics. APR stands for annual percentage rate and is used to calculate how much you’ll pay to borrow money - whether that’s in the form of a student loan, a mortgage, a balance carried on a credit card, or a different type of loan. Since borrowing money isn’t free, the person or organization that lends you money will set an APR to determine how much to charge you. APR is also known as an interest rate.
Let’s say you borrow $100 at an APR of 10%. After one year, you’ll have to repay the full $100 plus $10 - the $10 being 10% of the original $100. This additional amount is what makes lending worth it for the lender. If you don’t pay back your loan for another year, you’ll owe an additional $11 at the end of the next year because your balance went from $100 to $110, and 10% of $110 is $11. This cycle repeats until you’ve paid off your loan and don’t own any more money.
Keep in mind that the A in APR stands for annual, so while your interest might compound every day or every month instead of once a year, the APR is the total annual rate. But if your interest compounds every day, your debt can build up pretty quickly - so be wary.
In the case where you borrow $100 at a 10% APR, your interest might build up every month at a rate of 10% divided by 12 months - or about 0.83% every month. In other words, that $100 you borrowed at a 10% APR will grow by 0.83% every month until you pay it back. And unless you pay things off all at once, it's easy to build up more than just $10 over the course of the year because of how interest compounds.
The quicker you pay off your loan, the less you'll pay in interest because most loans calculate APR based off of your total remaining balance. Note that if you pay off your balance completely, you won’t have to pay any more interest. You’re only charged interest on money you haven’t paid back yet.
Interest and credit cards
APRs for mortgages are usually around 5%. APRs for car loans can be even lower. But APRs for credit cards can stretch above 25%, making credit cards an extremely expensive way to borrow money. Plus, not paying your balance off on a credit card is a good way to hurt your credit score and increase your interest rate even more.
Now, if you have a credit card and pay it off every month, don’t panic. Credit cards typically have terms that give you about 3 weeks after you get your bill every month where you can pay off your purchases without any interest. But if you decide to just pay the minimum or not pay your credit card bills in full, it’s easy to get into a lot of debt very fast. A 25% interest rate that compounds every day can turn even a small amount of credit card debt into a mountain.
Interest and credit scores
The way that lenders determine APRs is typically a function of your credit score and credit profile. While APR ranges might be different for different types of loans, having a good credit score can be the difference between several percentage points of APR.
Getting a 3% APR on instead of a 5% APR might not seem like much, but if you’re buying a house worth several hundred thousand dollars, having a good credit score that gets you a low APR can save you a ton of money. However, when it comes to credit cards, the best approach is to pay your balance in full every month. Even if your card has a high interest rate, paying it off in full every month keeps you from paying interest at all. It also helps keep your credit in good shape so that you can get lower APRs on other loans.
Fizz to the rescue!
We’ve gone over APRs in some detail, but it’s ok if you’re still confused. There are two main takeaways. First, APR is the percent of your loan that you’ll need to pay in exchange for borrowing money. Second is that the higher the APR, the more expensive it is to borrow money.
A big part of why APRs can be so confusing and convoluted is that it helps lenders charge as much as possible. In particular, it helps credit card companies rake in millions of dollars every year - often from unknowing customers. Sky high APRs are also a driving force behind mounting student loan and credit card debt. And in both cases, college students are the ones who are hurting.
At Fizz, we’re excited to tackle things head on. It’s pretty simple too - Fizz doesn’t charge any APRs at all. APRs might make sense if you’re borrowing money over longer periods of time, but Fizz doesn’t work that way. Since your Fizz card is paid off on a daily basis, there aren’t opportunities to build up debt and pay interest. Plus, we want your money to stay in your pocket where it belongs. So don’t wait! Sign up for Fizz today and say goodbye to credit card APRs for good!
Sam is a Kenyon College alum and is head of content at Fizz. He's been a go to personal finance resource among his peers since getting his first credit card during his sophomore year of college. He hails from Washington, DC, loves all things aviation, and currently lives in Los Angeles.