How to Calculate APR on A Credit Card UK

The Annual Percentage Rate (APR) is a key figure when comparing credit cards in the UK. It shows the true cost of borrowing, including interest and fees. This guide explains how to calculate APR, what it means, and how to use our interactive calculator.

What is APR?

The Annual Percentage Rate (APR) represents the annual cost of borrowing, expressed as a percentage. It includes both the interest rate and any additional fees that apply to the credit card balance. APR is calculated on a daily basis and then converted to an annual rate.

APR is different from the interest rate you see on a credit card. The interest rate is typically a flat percentage, while APR accounts for all fees and charges.

Why APR Matters

APR provides a more accurate picture of the total cost of using a credit card. It helps you compare different cards fairly, as some cards may have lower interest rates but higher fees that increase the APR.

APR vs Interest Rate

The interest rate is the percentage charged on the outstanding balance, while APR includes additional costs like annual fees, late payment fees, and other charges. The relationship between them is:

APR = Interest Rate + Additional Fees

How to Calculate APR

Calculating APR involves several steps, including determining the daily balance, applying the daily interest rate, and converting the result to an annual percentage. Here's how it's done:

Step 1: Determine the Daily Balance

First, calculate the average daily balance for the billing period. This is typically the average of the opening and closing balances.

Daily Balance = (Opening Balance + Closing Balance) / 2

Step 2: Apply the Daily Interest Rate

Multiply the daily balance by the daily interest rate to find the daily interest charge.

Daily Interest = Daily Balance × (Interest Rate / 365)

Step 3: Calculate Total Interest for the Period

Sum the daily interest charges for the entire billing period.

Step 4: Add Additional Fees

Include any additional fees, such as annual fees, late payment fees, or foreign transaction fees.

Step 5: Convert to Annual Percentage

Divide the total interest and fees by the average daily balance to get the APR.

APR = [(Total Interest + Additional Fees) / Average Daily Balance] × 100

APR vs APY

APR and Annual Percentage Yield (APY) are often confused, but they measure different things. APR is the simple interest rate, while APY includes the effect of compounding interest.

APR	APY
Simple interest rate	Interest rate including compounding
Lower than APY for the same product	Higher than APR for the same product
Used for loans and credit cards	Used for savings accounts and investments

For example, a credit card with an APR of 20% would have an APY of approximately 20.68% if compounded monthly.

Example Calculation

Let's calculate the APR for a credit card with the following details:

Opening balance: £1,000
Closing balance: £1,200
Interest rate: 18% per annum
Annual fee: £50
Billing period: 30 days

Step 1: Calculate Daily Balance

(£1,000 + £1,200) / 2 = £1,100

Step 2: Calculate Daily Interest

£1,100 × (0.18 / 365) ≈ £0.54

Step 3: Calculate Total Interest

£0.54 × 30 ≈ £16.20

Step 4: Add Annual Fee

£16.20 + £50 = £66.20

Step 5: Calculate APR

(£66.20 / £1,100) × 100 ≈ 6.02%

Result

APR: 6.02%

This means the total cost of borrowing over the year is 6.02%.

Frequently Asked Questions

What is the difference between APR and interest rate?: APR includes the interest rate plus any additional fees, while the interest rate is just the percentage charged on the balance.
How often is APR calculated?: APR is typically calculated on a daily basis and then converted to an annual rate.
Can APR be negative?: No, APR is always a positive percentage representing the cost of borrowing.
Is APR the same for all credit cards?: No, APR varies depending on the card issuer, your credit score, and other factors.
How can I lower my APR?: You can lower your APR by paying your balance in full each month, improving your credit score, or switching to a card with a lower APR.