APR vs Annual Fee: Which is Better?

Kylie Ora Lobell
Apr 26, 2022

A credit card can be incredibly beneficial when it comes to building your credit score and helping you find attractive loan offers. Yet they also come with terms and conditions that may seem new and hard to understand, such as APR, annual fee, and others

Since credit cards can be a risky way to build credit, it’s a good idea to learn some key terminology so you know exactly how to use your card and avoid costly fees. 

One of the most important concepts to learn about is annual percentage rate, aka APR for short. Another is how annual fees work on cards that have them.

After discovering more about APR vs. annual fees, you can decide if you want to add a credit card to your personal finance profile. 

What Does APR Mean?

APR is the annual interest you pay your lender to borrow money through loans or lines of credit.

It includes other costs such as loan origination fees, insurance, and closing costs, which you’d need to pay when purchasing a home. 

When it comes to different types of loans, APR is separate from the interest, which is a percentage that will be charged on the principal loan amount.

But when it comes to credit cards, the APR and interest rate are the same and used interchangeably. 

While mortgages and other types of loans may offer a fixed APR, most credit card companies use variable APR, which changes with the prime rate.

The Federal Reserve, which is the central bank in the U.S., decides on the prime rate according to many factors, including the state of the economy and the rate of inflation. 

You can find out your APR when you apply for a credit card and then decide if you want to go through with opening the card.

The typical APR for a credit card in 2022 is 18.32% but could be lower if you have a “Good” or “Excellent” credit score or higher if your credit score is “Fair” or “Poor.”

You will only be charged interest on your balance if you do not pay it off by your due date.

If you only make the minimum payments every month, not only will it take longer to pay down your balance, but you’ll also end up paying much more than just your original balance. 

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What Is an Annual Fee?

The fees and interest you have to pay on your credit card could get confusing, which is why it’s crucial to also dive into APRs vs. annual fees for credit cards.

The annual fee for a credit card is an additional yearly charge that you’ll have to pay if you keep a certain type of credit card open. 

Note: Not all types of credit cards charge annual fees.

You will typically only pay an annual fee if you obtain added benefits for using your card like cashback, rewards, brand partnership discounts, or miles for air travel.

If you do not have decent credit, you may also need to get a card with an annual fee until you can increase your credit score

Annual Fee Rates and Waivers

You may pay anywhere from $95 per year to hundreds of dollars per year for an annual fee if you have a card with excellent perks.

The fee will be charged to your credit card and appear on your statement. If you do not want to pay it anymore, try contacting your credit card companies and ask if they’ll waive it.

You could also close your card, but this might end up lowering your credit score. You’ll have to decide if you want to take that risk.

What About Monthly Fees?

Some companies won’t charge interest, but they do charge a membership or maintenance fee for the card through what’s called a financial subscription. 

Usually, startups offer financial subscriptions, which give you access to different financial services.

Common services that these providers offer are usually:

  • Credit builder installment loans to build your credit.
  • A cash account to securely store your money.
  • Early access to your paycheck. (Usually a day or two before your payday.)
  • Paycheck advances so you have access to money before your paycheck arrives.

Monthly fees range from $1 to $19.99 for many providers. 

How to Calculate APR

It’s important to see how interest/APR and fees work in action when looking at APR vs. annual fees.

To figure out your credit card interest charges, you can always take a look at the balance on your monthly statement.

If you're looking ahead and want to know how much interest you'll be charged at the end of the month, you can always calculate the interest yourself.

Here’s how to do it:

  1. Find out your card’s APR
  2. Divide the APR by 365 to find out your daily interest rate 
  3. Multiply your card’s daily interest rate by your average daily balance 
  4. Multiply that amount by the number of days in your billing cycle

Here’s an example of an APR calculation with fees:

You make $250 in purchases on your credit card for the month.

Your APR is 18%. 

Your billing cycle is 30 days.

First, let's calculate your daily APR:

.018/365 = 0.000049

Now, let's apply that to your purchases for the month/billing cycle:

0.000049 x 250 = 0.012

Finally, let's apply that daily total to the days in your billing cycle:

0.012 x 30 = $0.36 

Congratulations, you now know that you will owe $0.36 cents in interest for the month. APR is rarely the end of the story when it comes to what you pay per month for your credit card, however:

Let’s say you pay a monthly fee of $9.99 on your credit card and an annual fee of $95 (the monthly rate is $95/12 = $7.92).

Monthly, along with the interest, you’d pay $0.36 interest + $9.99 monthly fee + $7.92 annual fee = $18.27 in interest and fees for your card for the month.

Now, this calculation only works if your card's annual fees are charged per billing cycle and not all at once during a specified month.

Check your card terms, and don't hesitate to call and ask your credit card issuer questions.

You should feel confident in the terms and conditions of your credit card, and what kinds of fees you are charged monthly and yearly.

With that knowledge, you can make strategic decisions on how to use your credit effectively.

Between APR vs. Annual Fee, Which is Better?

When it comes to APR vs. annual fee, here are some pros and cons.

Pro: Some credit card issuers will offer to waive your annual fee for the first year, and potentially APR/interest, to get you started on the card, which is definitely an upside.

Con: In the second year, however, you’ll be charged interest, as well as your annual fee. 

It’s usually better to find a credit card with 0% APR—even if it’s during a promotional period and you have to still pay an annual fee.

At least you know the set rate for your annual fee and you aren’t going to end up owing more.

Interest is always a killer when you’re trying to pay down your debt. You’ll pay much more for your debt in the long run.

Another pro is that annual fees gain you access to perks like airline miles for travel, rewards for shopping and events, and much more.

For some, this can more than pay for the fee by providing something they don't have to buy themselves.

Staying Educated on Your Card Terms

No matter what kind of credit card you have, you should be educated on the APR and fees you’re paying, in addition to some common terms and tools that can help you manage your credit card debt.

Billing Cycle: The time between your statements, and the time period your credit card issuer uses to determine your interest and fees. This is a minimum of 21 days due to the Credit CARD Act.

Minimum Payment: The smallest payment you can make on your balance and still be considered in good standing.

Note: If you only make your minimum payment, you could end up paying hundreds of dollars in interest and fees above the original amount charged to your card.

It's considered a credit card best practice to either pay off your balance in full at the end of every billing cycle or at least pay above the minimum payment to minimize the growth of your debt.

Late Payments: If you make very late payments, they could end up on your credit report and lower your credit score.

That means the total cost of your debt would be more than the financial aspect of it.

Unfortunately, this can affect your greater financial future, as well.

Cash Advance: If you need to take a cash advance out from your card, you’ll usually pay a higher APR than a normal purchase on it.

And if you’re ever late on your monthly payment, you may be charged a penalty APR as well, which could be an even higher interest rate. 

Credit Card Consolidation Loan: If your debt is out of control, you can look into consolidating it, where you take out a loan and pay off all your cards with it, and then you only have one monthly payment to make instead of several. 

This can be helpful if your credit card debt has gotten out of control, and your APRs are also high.

The downside is that for these types of loans to be effective, you need to stop using your cards at least until the loan is paid off.

Balance Transfer: You can also transfer your debt to a balance transfer card—just make sure the balance transfer APR is 0% for an introductory APR promotional period, like 12 or 18 months, and that you can pay it off before that time.

Note that you will have to pay a balance transfer fee, which is usually 3% or 5%. 

The Bottom Line on APR vs Annual Fees

All in all, the cost of borrowing money is going to be higher than just your principal balance when factoring in APR and fees.

Make sure you know what you’re getting into before signing up for a new card and thoroughly consider whether or not it’s worth it in the end. 

As long as you use your card responsibly and pay it off in full every month, you won’t get into insurmountable debt and you’ll be able to raise your credit score before you know it. 

Kylie Ora Lobell

Kylie Ora Lobell is a personal finance writer with over 10 years of experience working with publications like MoneyGeek, Slickdeals, LegalZoom, OppLoans, SoFi and TaxAct. She has also been published in New York Magazine and the Los Angeles Times.

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