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What is APR? Understanding How APR is Calculated

APR is one of the most important factors to consider when choosing a credit card. In the ideal world you want to get a 0% APR credit card, but not all lenders offer this type of APR. The good news is that you do have some control over the interest rate that you’re approved for.

Here’s what you need to know about APR, including how it’s calculated and other important details to know as a cardholder.

What is APR?

If you’ve ever applied for a credit card, or even read about them, chances are you’ve seen the term APR. The term, which stands for annual percentage rate, not only applies to credit cards but also auto loans and mortgages. In simplest terms, APR is your interest rate in numeric form.

When choosing the best credit card, one of the deciding factors is likely to be APR. When comparing the interest rates between cards, you can determine how expensive transactions will be and how much you’ll have to pay towards interest each month.

Obviously to save money now and in the long-run, you want to find a credit card with a lower than average interest rate. In the ideal world you’ll get approved for a 0% interest APR.

How APR Works

Most credit card companies offer a grace period for purchases. If you make purchases and then pay off the entire balance before the due date, you only have to pay the amount owed and no interest is applied. However, if you carry a balance on a credit card, you’ll have to pay the interest rate on the outstanding balance.

There are many variables that control APR. Lenders use an index, namely the U.S. Prime Rate to determine an average rate, and then determine a margin. These two factors determine APR. Depending on the type of credit card you apply for, you may have a variable or non-variable APR.

Variable APRs change when the index changes. A non-variable APR stays the same throughout the life of the credit card.

Determining What You Owe

Credit lenders use a set formula to determine how much interest you owe on the outstanding balance on your card. Depending on the card terms, interest may be calculated daily or monthly. Be sure the read the terms and service of a credit card before applying for it.

Daily interest accrues each day where as a credit card with monthly interest has a set compound date that’s used to determine the period in which interest should be charged, depending on the balance.

Different Types of APR

Depending on how you use your credit card, you may be subject to different APRs. Purchase APR is the amount that’s applied to an outstanding balance for credit purchases. This is the main APR that you’re introduced to when applying for a credit card.

Some lenders also offer introductory APRs, also known as promotional APRs. This type of APR is a temporary interest rate that changes after a set time. You typically find introductory APRs with 0% interest cards that offer a limited time to pay off your balance without paying interest.

Another common type of APR is cash advance APR. This is the cost of borrowing cash against a credit card. This type of APR is often higher than the purchase APR. Cash advance APR also doesn’t often have a grace period whereas purchase APR does.

A last type of APR to be aware of is penalty APR. This is the highest APR that you’ll face a cardholder. This form of APR is often applied when you violate card terms and conditions such as making a late payment.

APR & You

As a cardholder, there are certain details you’ll want to know about APR, aside from what it is and how it’s calculated. It’s important to know that within the 12 months of applying for a credit card, the lender cannot change the APR. However, lenders can change APR if you’re approved for a variable rate or if you’re confined to a promotional period.

A lender can also change the APR if you violate the card terms and conditions. But, lenders are required to notify you 45 days ahead of the change before implementing the new APR. This makes it all too important to thoroughly read and understand the terms and conditions for that cards that you apply for. Not reading the fine print could cost you a lot of money!

Conclusion

There are many factors that go into choosing the credit card that’s best for you, but one of the most important factors is APR. Use this information to wisely choose a credit card that fits your budget and credit needs.

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Susan Paige

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