Credit card companies determine APR by adding two numbers: an index rate that reflects the broader cost of money, and a margin that reflects how risky you look as a borrower. For most variable-rate cards, the index is the prime rate, which sat at 6.75% in early 2026.1Federal Reserve Bank of St. Louis. Bank Prime Loan Rate (MPRIME) The margin is set by the issuer based on your credit profile, and the total is padded further to cover operating costs, rewards program funding, and the losses issuers absorb from borrowers who default.
The Prime Rate Is the Starting Point
Nearly every variable-rate credit card uses the prime rate as its index. The prime rate itself tracks the federal funds rate, which is set by the Federal Open Market Committee at its regularly scheduled meetings.2Federal Reserve. The Fed Explained – Monetary Policy As of mid-2025, the FOMC held the federal funds target range at 4.25% to 4.50%.3Federal Reserve. Monetary Policy Report – June 2025 The prime rate historically runs about three percentage points above that target, which is how it landed at 6.75%.
Your cardholder agreement spells out the formula: prime rate plus a fixed margin. If the agreement says “prime + 12%,” your purchase APR is 18.75% while the prime rate is 6.75%. When the FOMC moves its target and prime shifts with it, your APR shifts too. You won’t get a notice when that happens, because the formula was disclosed when you opened the account.4Federal Reserve. New Credit Card Rules Fed policy decisions ripple directly into what you pay on carried balances.
Your Credit Profile Sets the Margin
The margin is where the pricing gets personal. Two people approved for the same card can end up with very different APRs depending on what their credit reports show. Someone with an excellent FICO score in the mid-700s or above might see a single-digit margin, producing a total APR well below 20%. Someone with a score below 670 could face a margin of 15% or higher and a total rate past 25%. The gap between the best and worst rates on the same card product can easily exceed 10 percentage points.
Payment history carries the most weight in that calculation. Lenders look at whether you’ve missed payments, how recently, and how badly. They also weigh your credit utilization ratio, comparing revolving debt against total available credit. High utilization signals that you’re leaning on borrowed money, and issuers price that as risk. Debt-to-income ratios provide another view of the same question: whether your cash flow can absorb a new monthly obligation.
Prior bankruptcies, accounts sent to collections, and a run of recent hard inquiries all push the margin higher. Each signals a statistically greater chance of default, and the issuer prices that in. The margin on higher-risk borrowers needs to be large enough to cover the losses the bank will absorb from the share of similar borrowers who eventually stop paying.
Costs, Rewards, and Charge-Offs Get Baked In
If the prime rate and your credit score were the only inputs, APRs would still run higher than what banks pay to borrow money. Issuers fund transaction-processing infrastructure, fraud detection, customer service, and dispute resolution. Those costs get spread across every cardholder’s rate, whether you carry a balance or not.
Rewards programs add another layer. Cards offering 2% cash back or generous travel points have to fund those benefits, and the money comes from merchant interchange fees and interest revenue. When interchange alone doesn’t cover the rewards, the difference shows up in higher APRs. Premium rewards cards often carry rates a few points above no-frills cards aimed at the same credit tier for exactly this reason. Charge-offs, where borrowers default entirely, feed into the same math. Every unpaid account becomes a cost that profitable accounts have to absorb through their interest payments.
One Card, Several APRs
Most credit cards don’t have one APR. They have several, each applying to a different type of transaction, and each built from the same prime-plus-margin formula with a different margin.
- Purchase APR. The rate applied to everyday spending when you carry a balance past your due date. This is what most people mean by “credit card interest rate.”
- Cash advance APR. A higher rate that kicks in when you use the card to withdraw cash. Cash advances almost never come with a grace period, so interest starts accruing immediately. Expect this rate to run several points above your purchase APR.
- Balance transfer APR. The rate applied to debt you move from another card. Promotional 0% offers often target this bucket, but once the promo expires the ongoing balance transfer rate may differ from your purchase APR.
- Penalty APR. A much higher rate the issuer can impose after serious delinquency, subject to the limits described below.
Cash advances carry a higher margin because they’re riskier for the bank. There’s no underlying purchase that could be returned, and borrowers pulling cash are statistically more likely to be in financial distress.
When the Rate Can Change After You’re Approved
The Credit Card Accountability Responsibility and Disclosure Act of 2009 restricts when an issuer can raise the rate on your existing balance. The general rule is that they can’t, with a short list of exceptions.5Office of the Law Revision Counsel. 15 USC 1666i-1 – Limits on Interest Rate, Fee, and Finance Charge Increases Applicable to Outstanding Balances
- Variable rate changes. If your rate is tied to an index like prime, it moves with that index automatically. No notice required.
- Expiring promotional rates. When an introductory rate ends and reverts to the previously disclosed ongoing rate, that’s not considered an increase because you agreed to it upfront.
- Workout agreement failures. If you entered a hardship arrangement and stopped meeting its terms, the issuer can restore your prior rate.
- Serious delinquency. If your minimum payment is more than 60 days late, the issuer can apply a penalty rate.
Penalty APRs commonly reach the upper 20s, but the trigger is specific: only when you fail to make even the minimum payment within 60 days of the due date. The issuer must give you written notice explaining the increase, and the penalty rate must be reversed within six months if you make your minimum payments on time during that period.5Office of the Law Revision Counsel. 15 USC 1666i-1 – Limits on Interest Rate, Fee, and Finance Charge Increases Applicable to Outstanding Balances That’s a mandatory off-ramp, not a discretionary review.
For increases that do require notice, such as raising the margin on future purchases or introducing a new fee, the issuer must give at least 45 days’ advance written notice.6Consumer Financial Protection Bureau. Regulation Z 1026.9 – Subsequent Disclosure Requirements During that 45-day window, you have the right to cancel the account and pay off your existing balance under the old terms. Most people assume they’re stuck once the notice arrives; they aren’t.
One clarification worth making: the “reasonable and proportional” standard you sometimes hear about applies to penalty fees like late payment charges, not to the penalty APR.7Federal Register. Credit Card Penalty Fees (Regulation Z) Late fees have a regulatory ceiling. The penalty APR doesn’t have a specific dollar cap, but its triggers and duration are tightly controlled.
Why Rates Can Legally Run So High
If you’ve wondered why credit card APRs can exceed 25% when some states have usury laws capping interest at far lower levels, the answer traces to a 1978 Supreme Court decision. In Marquette National Bank v. First of Omaha Service Corp., the Court held that a national bank can charge out-of-state customers the interest rate permitted by the state where the bank is chartered, even if the customer’s home state caps rates lower.8Legal Information Institute (LII) at Cornell Law School. Marquette National Bank of Minneapolis v First of Omaha Service Corporation The legal basis is a federal statute allowing national banks to charge interest at the rate permitted where they’re located.9Office of the Law Revision Counsel. 12 USC 85 – Rate of Interest on Loans, Discounts and Purchases
The ruling produced a familiar pattern. States like South Dakota and Delaware eliminated or raised their usury caps to attract bank headquarters, and major card issuers incorporated there. State interest rate caps are effectively irrelevant for credit cards issued by national banks.
One federal rate cap does exist, and it applies narrowly. The Military Lending Act caps the all-in cost of most consumer credit, including credit cards, at a 36% Military Annual Percentage Rate for active-duty servicemembers and their dependents.10Consumer Financial Protection Bureau. What Are My Rights Under the Military Lending Act The 36% MAPR folds in finance charges, credit insurance premiums, and certain add-on product fees, making it a broader measure than a standard APR. For everyone else, the ceiling on your card’s rate is whatever the issuer disclosed when you opened the account and whatever the CARD Act’s notice rules allow going forward.