What is APR?

The APR is the amount of interest you will be charged each year, as a percentage of each pound you owe on your credit card or other debt.

For example, if you owe £1,000 and the APR is 10%, you will pay £100 in interest over the year.

The key thing to understand with interest payments on any form of borrowing is that you can also expect to pay interest on the interest. This is known as compound interest.

For example, if you kept a balance of £1,000 for two years, at the end of the first year, your balance would be £1,100. The second year, you would pay 10% interest on the £1,100, not just on the original £1,000. This would work out as £110, leaving you with a balance of £1,210 after two years.

Usually with credit (or more specifically, loans), you would consider the APR and the length of the loan. If the loan had a high APR but a short time period of borrowing, then this may be cheaper than a low APR loan that lasts a number of years.

As credit cards are not time-based (you can have one for as long as you want), this attaches greater importance to the standard APR, making it the single biggest factor when considering the cost of your credit card.