One important factor that contributes to debt is your credit card APR, so it would pay to know more about how it works.
APR, or the Annual Percentage Rate, is one of the most important rates associated with your credit card and should be considered when making all purchases if you don’t plan on making your full credit card payment each month.
APR comes into play when you carry over a balance from one month to another. Read one to learn more about what APR is and how it’s calculated.
Getting to Know More About APR
You’ve probably met the word APR when you were applying for a new credit card and wondered what it meant. APR or the Annual Percentage Rate is a structure of just how much interest you’ll incur.
It is imperative to pay close attention to the APR when applying for a card. This metric can help you compare just how expensive your interest fees will be when the time comes to make a payment.
How Does It Work?
Generally, credit cards have no interest if you choose to pay off your purchased amounts at the end of the month. But, if you carry your debt forward, that’s when the interest starts coming in.
The interest you incur, if you carry your debt forward, will be the one that you agreed upon with the issuer. Don’t worry about the first few purchases; with those, you won’t incur interest due to the grace period given. It will be on your outstanding balance.
Calculation of APR
The calculation of the interest uses indexing, and then a margin is added. The margin is what the bank charges for interest on your debit/credit. With the two added together, that’s where credit card APR comes from, and the rates change if the index changes.
The formula the issuers use to determine how much you should pay in interest is calculated daily. If your card has multiple APRs, such as a balance transfer APR, then calculations are applied to all.
Types of Credit Card APR
There are different types of APRs that you should keep an eye out for. They are based on how you use your card.
- Purchase APR – Where you’re charged for your credit card purchases.
- Cash Advance APR – If you at some point want to borrow cash from your card, this is where you should carefully look.
- Introductory APR – Also known as promotional APR (Low-interest rate for a limited time).
- Penalty APR – And the highest APR today has got to be the penalty APR, which is charged when you go against the agreed-upon terms.
Understanding some of the terms used when it comes to credit cards can help you avoid getting into even more debt. Knowing what credit card APR is and how it is calculated will ensure that you know how much you’ll be paying on your next credit card payment.