Perhaps you’ve seen the term APR, or Annual Percentage Rate, used to refer to everything from mortgages and car loans to credit cards. In this article, we will look at the credit card APRs that you have likely seen on your monthly statements. Knowing what an APR means, how it is calculated, and how it is applied can help you make more informed credit card decisions.
Understand the APR
The APR is an annualized representation of your interest rate. When deciding between different credit cards, the APR can help you compare how expensive a transaction will be with each one. It is useful to consider two important things about the way the APR works: how it is applied and how it is calculated.
How the APR works
Generally, credit card companies offer you a grace period for new purchases. If you only make purchases and pay your balance in full at the end of each month on the due date, you pay only the amount you owe without interest. However, if you decide to have a balance on your card, you pay the agreed-upon interest on your outstanding balance.
How to calculate the APR
Many variable interest rates start by using an index, such as the US Prime Rate, and then add a margin. The result is the APR. Variable rates can change if the index changes, and some banks also offer a fixed APR. Here is an example of how the rate is set:
The United States Prime Rate, published in the Wall Street Journal
The margin charged by the bank
Annual percentage rate
How to know how much you owe
Banks use a formula to determine how much interest you pay on your outstanding balance. They calculate it using a daily or monthly periodic rate, depending on the card.
Keep in mind that some accounts have multiple APRs, so this calculation can be applied to each one. The statement provides more information about how to calculate the balance subject to the interest rate.
Annual percentage rate
Days in a year
Daily periodic rate
TPD multiplied by the days of the billing period
Balance subject to interest rate
Types of APRs
There are different APRs based on how you use your credit card. When choosing a credit card, it’s a good idea to consider these rates in addition to your credit needs.
APR for purchases
The rate that applies to credit card purchases.
APR for cash advances
The cost of borrowing cash from your credit card tends to be higher. There may be a different APR for checks or certain types of cash advances. There are no grace periods.
Penalty APR rate
This is usually the highest APR. It can also be applied to certain balances if you do not comply with the terms and conditions of the card, such as not making payments on time.
(or promotional APR) Features a lower APR for a limited period of time. It can be applied to specific transactions, as well as balance transfers, cash advances, or any combination.
The APR and the cardholder
Before getting any credit card keep this in mind:
- The APR can help you evaluate all offers and promotions.
- Lenders generally cannot change the APR for the first 12 months. However, an APR may change in that period if it is a promotional or variable rate, or for breach of terms and conditions.
- Consumers should review the terms and conditions, including the APR, before using their cards.
- In most cases, when companies change their terms and conditions, they must give 45 days’ notice.
Remember, while the APR is important, it is just one of the factors to consider when choosing the right credit card for you .