The annual percentage rate (APR) is the interest rate applied to credit card balances, and it affects card bills by determining the amount of interest charged on unpaid balances. If the overall debt is not paid in full each month, the additional interest will increase your debt. For example, if you spend £2,500 on a credit card with an APR of 21.9% and pay £500 back every month, it would take six months to clear the balance and the total paid back would be £2,633.
When the timing of money coming into the company doesn’t coincide neatly with money going out, a credit card can bridge the gap nicely. This is where APR, or annual percentage rate comes in. Understanding APRs and what they mean for your borrowing costs can be one of the most cost-effective ways of managing your cashflow.
In this article, we’ll show how APRs impact your credit cards, as well as the different types of APR and what they mean for your business.
How annual percentage rate (APR) works
Annual percentage rate shows the true annual cost of borrowing on your business credit card if you don’t pay your balance off in full during the interest-free period – typically the month before your statement is due.
It includes both the interest rate and any standard fees attached to the card, but not extras like late payment or transfer fees.
The higher the APR, the more expensive it will be to carry a balance on the card.
How does the APR affect card bills?
The advertised APR on a credit card is the rate offered to at least 51% of applicants [1]. However, your business APR could be different, depending on many factors including credit status.
How to calculate APR (with formula)
Calculating your monthly or daily APR is relatively simple, although it may not exactly match the sum on your card statement, due to rounding, changes in payment periods or fluctuations in the rate.
Monthly APR
Current APR / 12 = Monthly Rate
Monthly Rate x Current Balance = Monthly Interest Charge
Daily APR
Current APR / 365 = Daily Rate
Daily Rate x Current Balance = Daily Interest Charge
On a monthly balance of £3,000 and an APR of 30%, divide the APR by 365. The daily APR would be 0.0822%. Multiply £3,000 by 0.000822 (the percentage expressed in its decimal form) and the daily charge would be £2.47.
For the monthly charge, multiply the daily charge by the billing period – typically 30 days. So, you could expect to pay £73.98 over the month.
APR and charge cards
If a card doesn't have an APR, it's likely a charge card and not a credit card. With credit cards, you're only required to pay off a small portion of your balance monthly (incurring APR costs), while charge cards require full payment at the end of each period.
The American Express® Business Platinum Card is a Business Charge Card, meaning you avoid paying APR. Instead, it gives you the flexibility you need when it comes to your payment schedule. Its payment period of up to 54 days¹ helps you clear your bill each month. You can also build up Membership Rewards® points to spend at hundreds of digital checkouts across travel, dining and retail².
Jessica Flinn, CEO of Jessica Flinn Fine Jewellery uses an American Express Business Platinum Charge Card to manage her monthly ad spend costs. “For us, it's a really great way of consolidating all of those digital marketing spend into one particular day and then paying it off in one payment," she says, adding that to aid cashflow they will schedule that payment on a day that avoids other big regular outgoings such as the payroll.
"It’s not something you should do when you’re fresh in your business and your costs are unpredictable, but when you’re spending a similar amount on things every month and you can predict them, that’s where the Charge Card comes in.”
Types of APR
Something to consider when choosing a credit card is whether or not the APR will stay the same from month to month. There are several different types of APR, some will vary according to card provider and product, and others change according to how you use the card over time.
Purchase APR
The Purchase APR applies when you use your card for purchases. It's usually charged at the payment cycle's end and won't apply if you pay off your balance on time.
Balance transfer APR
This is a rate levied on sums transferred to another card or bank account. There are often dedicated balance transfer cards specifically for this purpose.
Cash advance APR
Using your credit card to borrow cash is often the priciest option. It usually has the highest APR, and interest starts accumulating from the transaction day, not after the payment period ends.
Introductory/promotional APR
Introductory offers like 0% APR on new card accounts for purchases or balance transfers might be available, depending on conditions such as specified purchase amounts or transfer fees.
Penalty APR
If you miss or delay a payment, your card provider might increase your APR. This is particularly important for those using promotional APRs like 0% interest balance transfers, because they can be revoked and possibly replaced with a standard or higher APR.
James Clayton, Director of Dead Simple Accounting, warns: “It's essential to carefully review and understand the different types of APRs associated with any financial product before you apply or borrow. This knowledge will help you make informed decisions about how to manage your borrowing, budgeting, and repayment.”
How to use APR
Knowing your APR helps you manage your budget and forecast your spending and costs accurately³. For example, the representative APR can give you an immediate idea if a credit card will suit your needs, depending on other factors such as the payment terms and fees.
However, you do need to keep track of your APRs as they can even vary within the same credit card depending on their use and they don’t necessarily include all fees and charges. Cards with a fixed APR must inform users before rates change, but variable APR cards can and do change according to wider market fluctuations.
Clayton advises: “APR is a valuable tool for understanding the cost of borrowing, but it's essential to be aware of its limitations, such as variable rates and potential hidden fees. Always read the fine print of loan or credit card agreements and consider your personal financial situation when evaluating APR offers.”
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full £1 spent and charged, per transaction. Terms and conditions apply.
3. The information provided in this article is for informational purposes only and does not constitute financial advice. Always consult a qualified professional before making financial decisions. We are not liable for any actions taken based on this information.
Sources:
[1] Forbes, What Does ‘APR’ Mean On Loans And Credit Cards?, April 5th, 2023
