What is Representative APR and Why is My APR Higher?

Credit card interest rates in the UK are much higher than other types of loans. Why is my APR so high? Learn more here!

If you’ve been shopping for credit products recently, you may have noticed that credit card interest rates are far higher than other types of loans or credit lines. According to data from the Bank of England, the average credit card interest rate in the UK has risen well above 20%. For example, American Express cards feature representative APRs as high as 30%.

If you’re opening a credit card for the first time, or are focused on improving your credit, you might be shocked to find that your interest rate is even higher than the representative APR. But why is that? 

To answer this question, let’s take a look at what exactly APR is, what representative APR means, and why your actual APR might be higher. Let’s get right to it!

What is APR?

Your annual percentage rate (APR) refers to the total cost you will pay over a year for a loan or credit balance. Your APR represents the amount of money your lender or card company will charge in exchange for lending you money. The lower your APR, the better.

For example, a £100 purchase on a card with 20% APR would accumulate £20 in interest if not paid over a year, whereas a card with 15% APR would accumulate just £15 in interest.

What is the Difference Between Representative APR and Real APR?

To understand how APR is calculated, we need to make a distinction between representative APR and real APR—that is, the APR you’re actually offered.

Representative APR

Representative APR is used for advertising purposes by credit card companies. The FCA requires that at least 51% of customers must be eligible for the representative APR, which means that only about half of the credit card applicants are actually eligible for the advertised APR.

Real APR

Real APR is the amount that you’ll actually pay, rather than the representative APR rate used in adverts. Your real APR could be much higher than the advertised representative APR, typically if you don’t have a well-established credit history, or are rebuilding poor credit.

To avoid being locked into using a card with a high APR, check if the card you are applying for offers a soft eligibility check, and always be sure to read your final offer or contract thoroughly before signing anything.

Related Read: What is a Good APR for a Credit Card in the UK?

Why is My APR Higher than the Representative APR?

If your APR is higher than the representative APR, there may be several factors contributing to it. Some of the main factors that could impact your real APR are your:

  • Credit history: A higher credit score and strong history of on-time bill repayments usually leads to a lower APR.
  • Current financial situation: Lenders will likely assess your current regular income, your savings and outstanding debts, and credit utilisation when determining your real APR.
  • Past dealings with the lender: Additionally, lenders will take a look to see if you’ve borrowed from them in the past and how it went.

A major reason credit card companies offer high APR is because they don’t have many options when it comes to recovering their money if users fail to make payments. Where a bank may be able to repossess a house or car if you miss repayments, credit card companies have limited options.

Reporting your missed payments to credit reference agencies or issuing a CCJ, credit card companies can penalise you, but they don’t guarantee that they’ll actually see their payment. High APRs allow credit card companies to compensate for the increased risk they take on when extending a line of credit to users with no credit or poor credit.

Related Read: What is the Average Credit Score in the UK?

What Can I Do to Increase My Chances of Receiving the Representative APR?

One thing you can do to boost your chances of receiving the representative APR is to have a strong credit score, but that’s easier said than done. However, improving your credit score over time is possible if you focus on the essentials:

  • Make payments on time: Timely payments demonstrate your trustworthiness to lenders more than any other factor.
  • Keep your accounts open: Payment history is essential, but so is your overall financial history. Being able to demonstrate a significant history with banks and credit cards can go a long way in improving your credit score and earning you the representative APR.
  • Keep your credit card balances low: Utilise no more than 25% of your credit limit at a time. Lenders like to see regular activity too; making several payments a month in order to maintain that low level of credit utilisation is a good idea.

Related Read: How to Use a Credit Card Wisely

Build Your Credit Score for a Better APR

The better your credit score, the more confident lenders and credit card companies will be when they extend you a new line of credit. If you’re new to building credit or have poor credit, improving your credit score can seem like a daunting task. But fortunately, Pave is here to make it easier.

Through bills monitoring, personalised credit fixes, and active credit building, Pave helps members build their credit score to receive favourable interest rates, better credit cards, and secure the credit lines they need to turn their dreams into reality.

To see for yourself why hundreds of thousands of people across the UK have turned to Pave for help building credit, sign up online, or download the Pave app from the App Store or Google Play today!