Understanding APR & Interest
What APR actually means, how daily interest is calculated on credit products, and why the stated rate is not always the rate you pay.
Understanding APR & Interest
Interest is the cost of borrowing money — or the reward for saving it. In the UK, the standard measure is APR (Annual Percentage Rate), but it is often misunderstood.
What Is APR?
APR stands for Annual Percentage Rate. It is a standardised way of expressing the cost of borrowing over a year, including fees and compound interest. Lenders are legally required to show APR so that consumers can compare products.
- A credit card with a 24.9% APR costs roughly £249 per year in interest for every £1,000 of outstanding balance.
- A personal loan at 6.9% APR costs roughly £69 per year per £1,000 borrowed.
Representative APR vs. Personal APR
When you see an advertised rate, it is usually a representative APR. By law, at least 51% of successful applicants must be offered this rate or better. The other 49% may be offered a higher rate based on their credit profile.
This means the rate you actually get may differ from the headline figure.
How Daily Interest Works on Credit Cards
Most UK credit cards charge interest daily, not annually. The daily rate is calculated as:
Daily rate = APR ÷ 365
For a card at 24.9% APR:
| Metric | Calculation | Value |
|---|---|---|
| Daily rate | 24.9% ÷ 365 | 0.0682% per day |
| Monthly cost on £2,000 | £2,000 × 0.0682% × 30 | ≈ £40.93 |
Interest compounds daily — meaning you pay interest on interest. Over a full year, the effective annual rate is slightly higher than the stated APR because of this compounding.
Stated Rate vs. Effective Rate
The stated (nominal) rate is the headline figure. The effective rate (EAR) accounts for compounding.
For example, a 24.9% APR compounded daily gives an EAR of approximately 28.2%. Savings accounts show the opposite: a bank advertising 5% AER (Annual Equivalent Rate) is showing you the effective rate including compounding — which is the real return you earn.
0% Promotional Periods
Many credit cards offer 0% on purchases or 0% on balance transfers for an introductory period (often 12–28 months). Key things to understand:
- Interest is deferred, not waived — if you miss a payment or break the terms, the 0% deal can be withdrawn
- Balance transfer cards usually charge a transfer fee of 1–3% of the balance moved
- Once the 0% period ends, the revert rate (often 22–25% APR) kicks in
Interest on Savings
For savers, interest works in your favour. A cash ISA paying 4.5% AER on £10,000 earns:
£10,000 × 4.5% = £450 per year
With monthly compounding, you earn slightly more because each month's interest starts earning its own interest.
Tips for Managing Interest
- Pay credit cards in full each month to avoid interest entirely
- Compare EAR, not nominal rates, when choosing savings accounts
- Set calendar reminders before 0% periods end to avoid revert rates
- Overpay loans where possible — even small overpayments reduce total interest significantly
Explain Like I'm 5
Interest is like a fee you pay for borrowing someone else's toys. If you borrow a toy for a day, you might give them one sweet. But if you keep it longer and longer, you owe more and more sweets — and you even owe extra sweets on the sweets you already owe! That is why it is best to give things back quickly.
Key Takeaways
- APR is the standardised annual cost of borrowing — but your personal rate may differ from the advertised representative APR.
- Credit card interest is typically charged daily and compounds, making the effective rate higher than the stated rate.
- 0% promotional deals are powerful but have conditions — always know the transfer fee and revert rate.
- Paying your credit card in full each month is the simplest way to pay zero interest.
CoreFi calculates the real cost of your credit — see your actual APR vs. stated APR.
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