When it comes to shopping for or comparing credit cards, or even understanding a card you already have, the terminology can be tricky. However, it is important to understand the terms and disclosures that come with your card to ensure you are getting the best deal. One of the biggest factors to consider when choosing a credit card is the APR. A common question is, how does APR work on credit cards? There are many facets to answering this. In this blog, we will learn all about APR – for credit cards, that is!
To begin to understand how APR works, you must first understand what APR is. APR, or annual percentage rate, is simply your interest rate stated as a yearly rate. The interest rate is the price you pay for borrowing money.
On some loan types, such as mortgage loans, there is a difference in the interest rate and APR. The difference is due to other costs associated with the loan which get factored into the APR.
Fees are not included in the APR on credit cards because not all fees apply to each person. Fees will depend on your personal use of the card.
At this point, you already know that APR is a yearly interest rate. Interest is compounded daily and charged monthly. With all of these different timeframes and terms, there is no doubt that trying to calculate your interest could quickly get confusing.
There are several different methods for calculating APR and interest. According to the Consumer Financial Protection Bureau, most financial institutions use the average daily balance method. This is the method used here at 121FCU. To better understand this method, the steps are broken down below.
To walk through the calculations, we will use a hypothetical APR of 17.3%, and an average daily balance of $700.00.
1. Divide your APR, after converting the percentage to a decimal, by the number of days in the year to get your daily periodic rate.
0.173 / 365 = 0.00047 This new number is the daily periodic rate
2. Multiply the daily periodic rate by your average daily balance. You may have to calculate your average daily balance if you don't already have this figure.
0.00047 x $700.00 = $0.33
3. Multiply this number by the number of days in your billing cycle.
$0.33 x 30 = $9.87 interest charged for this billing cycle
Please keep in mind, when calculating interest yourself, your answer could vary slightly from that of your financial institution due to differences in rounding. Also, some institutions use 365 for the number of days in a year, while others use 360.
Other methods, used less frequently are:
• Previous balance method.
• Adjusted balance method.
This handy guide breaks down how to calculate interest on all of these methods:
Following these important APR tips will save you money:
• Pay your balance off before your grace period is over to avoid paying interest.
• Don't pay your credit card late or your APR will rise, costing you more hard-earned money.
• Not all APRs are the same – different transaction categories have different APRs.
• Keep your credit score up to be eligible for a better APR.
• The earlier in a billing cycle you make your card payment, the less interest you will pay.
• APR is not the only factor that matters when choosing a credit card. A card could have a slightly lower APR, yet have other high fees that will cost you more in the long run.
Hopefully the question "How does APR work on credit cards" has now been answered. Remember to review the APR and all other terms listed on a credit card disclosure when comparing options. Consumer protection regulations have made it easy to shop and compare! Check out the excellent credit card options offered at 121FCU today!