Understanding Your APR
The annual percentage rate is quite often referred to as the interest rate. When deciding between various credit cards, the APR can help you to decide which card is better for your financial needs. While there are various perks with specific cards, if you have a high APR, the benefits are likely not to be worth it in the end. You will simply be paying exorbitant fees which can negatively impact your finances. Based on this, there are couple of things that you need to know about APR and to understand how it works.
Overall, credit card companies will typically offer a “grace period” for new purchases. If you make purchases and pay off your balance of the credit card each month by the due date, you only pay the amount you owe, with no additional interest charged. However, if you choose to carry a balance on your credit card, over to the following month, you will also need to pay the agreed interest rate on your outstanding balance. This is the main reason why paying off your balance in full every month is such a major financial benefit.
The APR is typically used by banks as a benchmark and is often tied to the US prime rate. The prime rate is tied to the 10-year interest rate and is public information that’s freely available in the Wall Street Journal. Beyond this, the bank will charge a margin above this, so for example, if the prime rate is 5%, and the bank chooses to tack on 7%, you will have a 13% interest rate on your credit card. Credit cards can use either a daily or monthly periodic rate, depending on the lender. For example, if they are calculating interest on a daily periodic rate, they will take the APR and divide it by 365 days to get the interest per day. Most lenders today use a daily periodic rate.
Various Types of APR
Your annual percentage rate will not be the same across the board. There are various types of annual percentage rates that you can be charged. For example, there is the purchase APR, which is what you will pay for goods and services purchased with a credit card, under normal circumstances. Think of shopping, as an example.
There is also a cash advance APR, which is the cost of borrowing cash from your credit cards. This APR is almost always higher than the purchase APR and can be very expensive. There are no grace periods involved in this APR rate, and you will owe interest as soon as you take the money out.
Even higher than that would be penalty APR, which is typically something that you will see when you violate the terms and conditions of the credit card, like failing to make credit card payments on time. These can be exorbitant and can cost you a lot of money in a very short amount of time.
There is also an introductory APR, which is the promotional APR that you may have for a limited time period. It can apply to not only specific types of transactions, but it could also be applied balance transfers or cash advances as well. This will vary from card to card, so make sure you understand what your introductory APR is, assuming there is one, and what it covers.
One of the most important features of a credit card is the APR. Make sure that you are getting the best deal possible, because the APR that a bank charges will vary quite wildly from one lender to the next. Keep in mind, that overall, some lenders will not charge the APR for the first year, or it will be limited for a short period only. Make sure that you review the terms and conditions, including what the APR is going to be, before using a credit card. Under most circumstances, when the credit card company is going to change the terms and conditions, they must give at least 45 days advance notice before doing so. This gives you the opportunity to pay off any outstanding debt and to get out of the contract.
Credit is something that can be quite useful if used wisely. However, not understanding or paying attention to the APR is one of the quickest ways to burn through money unnecessarily.