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What is APR?
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The APR on your credit card stands for ‘annual
percentage rate’. It’s the interest
rate that you’ll pay for carrying a balance
on your credit cards stated as an annual percentage
figure. It also applies to cash advances and transferring
a balance from another card. Still confused? The
concept is simple enough at its most basic.
If your APR is 16%, it means that
you will pay interest in the amount of $16 for every
$100 that you owe over the course of a year. If
the balance on your credit card is $1000, then you
owe $160 in interest. Unfortunately, it’s
not that simple in practice for a number of reasons.
Most credit cards have multiple
APRs.
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Your credit card may have an APR of 14% for purchases,
but charge a higher rate for cash advances or
for balances transferred from other cards.
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Your credit card may have ‘tiered APRS’,
for instance, 15% on balances up to $500, but
17% on balances above $500.
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Your
APR may increase if you are late in making payments,
or exceed your credit limit.
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Your
card may have an ‘introductory APR’
which will only apply for a certain period of
time after you receive your card. After that,
the new APR will take effect.
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A
credit card may have a ‘delayed APR’,
for example, ‘No interest till next year’.
To get an accurate picture of what your credit
card will cost you to use, be sure to check what
the APR will be like after the delay period.
If you don’t pay your balance in full each
month, even a small difference in your APR can make
a big difference in what you pay for using your
card in a year. For example, if you carry an $8000
balance (which is lower, by the way, than the average
balance carried on credit cards by the typical family
in the year 2000), you’ll be paying the following:
Obviously, it is in your best interest to choose
a card with the lowest possible APR, and keep it
low by paying your balance on time.
Fixed vs. variable APR
Another distinction to watch for is the difference
between a fixed-rate and a variable-rate APR. In
a fixed-rate APR, your APR remains the same –
or at least doesn’t change often. Credit card
companies may change the rate, but they are required
to give notice in advance. A variable-rate APR is
usually tied to another rate – often the Prime
Lending Rate – and it will fluctuate
as that rate does. Check your credit card agreement
to learn how often and when your credit card company
can change your APR.
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| What
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