When Selecting a Credit Card, APR Doesn’t Matter

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This is a bit of a follow up to my article on how credit cards work.

APR, or Annual Percentage Rate, is how credit card companies make money. (There's also their transaction fees of 1-3% of each transaction, but we'll ignore that for now, because it's usually invisible to consumers.)

APR is the finance charge that is levied on you when you don't pay off all of your charges. It can range from 0% (usually an introductory offer) to as high as 39.6%! When you carry a balance, i.e. do not pay the full statement balance on the bill you receive every month from, you are charged a finance fee. This fee is calculated by…blah…blah…blah…


I have never paid a dime in interest to credit card companies. I have had a credit card since I was 20 years old. That is 6 years of credit card usage without a single interest payment or finance charge. I'm not special. Thousands of people manage their credit cards the right way like this. What was my APR during these 6 years? I don't know. I don't care.

APR does not matter if you pay your statement balance in full every billing cycle.

When selecting a credit card, you should worry about things like:

  • Annual fee ($0 is about right)
  • The value of the reward/cash back points
  • The amount of points issued for each dollar of spending
  • If there's any spending bonuse

NOT the APR. If you're a smart credit card user, APR does not matter. Unless it's a 0% balance transfer and you can get cash out of it, but that's not very common anymore.

The Lifecycle of a Credit Card Charge

When you charge something to your credit card, either online, in person, by mail (does anyone still do this?) or over the phone, it follows this predictable cycle:

  1. Pending charge. It usually sits in this state for a few days. If there was a tip added, the pending charge may only reflect the original swiped amount, not the total with the tip. Gas stations also are infamous for charging only a dollar to ensure the card is legitimate, and then charging the full amount latter.
  2. Posted transaction. This means the credit card company has accepted the charge from the merchant and has posted it to your account.
  3. Statement balance. At the end of your billing cycle (usually the same day every month), all of your charges and payments are added up for that cycle. You are issued a statement, or bill, and summarizes your transactions and lists your statement balance. You must pay this amount in full to not receive any finance charges.

credit-cardsI make payments on my credit card twice a month, when Uncle Sam pays me on the 1st and 15th. Any time I swipe my card or buy something online, I immediately set aside the money for that purchase in a separate “bills” account. That way there is never even the most remote possibility that I will overspend or I will be late/miss a payment.

When I pay my credit card, I pay the outstanding balance. This is the total amount of posted transactions, minus any previous payments. Usually when I get my statement at the end of the billing cycle, it's a $0 bill, because I've made two payments during the month.

Effect on Credit Card Rewards

There is another misconception that making payments before the statement is issued will decrease the credit card reward points because points are only issued for the dollar amount on your statement balance. This is false.

I'm pretty sure this rumor was started by credit card companies so people would leave money on their statement, forget to pay, and then receive a late payment fee.

Credit card reward/cash points are issued for each dollar of transaction. There is no difference between paying off the posted transaction immediately and waiting for it to be posted to your statement. Be smart, pay early and often.

What have we learned?

  • At least pay your statement balance in full every billing cycle (I recommend paying the full outstanding balance every time you get a paycheck)
  • If you do the step above, your credit card APR will never matter
  • Credit card reward points are calculated on each dollar spent, nothing more, nothing less

With these three principles, you'll never give the credit card companies a penny in interest and be able to reap the benefits of free car rental insurance, cash back points, and other great benefits.

Be smart, my friends.

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