Definition of a Credit Card APR
Millions of Americans rely on credit cards to meet day-to-day expenses and cover unexpected emergencies. Unfortunately, many cardholders don't fully comprehend the cost of using credit for their purchases. In the midst of a shaky economy, it is especially important to understand how interest is calculated for credit card purchases.
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What Is APR?
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Annual percentage rate (APR) is the interest rate, expressed in percentage, assigned to your credit card account by the card issuer. APR can have a profound effect on your credit card balance, and the total amount you will pay for your credit card purchases. Even if you sign up for a new card under a special introductory APR, you may end up paying more than you expect, depending on which type of APR your credit card company calculates your interest charges.
Nominal APR
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Nominal APR is a simple interest charge, and is the type of interest most consumers expect to pay when applying for new credit. Nominal APR can be calculated by taking the interest rate assigned to your credit account and multiplying that number by your purchase total. Using a nominal APR of 4.99 percent for a purchase balance of $100, your total balance would be $104.99. Unfortunately, most credit card interest charges are calculated using another type of APR known as effective APR.
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Effective APR
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Effective APR is the type of interest most consumers actually pay when using their credit card accounts. Effective APR is calculated by "compounding" interest on your credit card charges, so that instead of paying an interest charge one time, you pay the interest charge every month that you carry a balance on your credit card. Charges derived from effective APR also apply to any late fees, over-limit fees, annual fees or other finance charges on your account.
Introductory APR
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Introductory APR is a promotional interest rate that many credit card companies use to attract new customers. Introductory APR is applicable for a specified time frame, usually three months to one year. Your actions as a cardholder can cause your introductory APR to go up before the specified date. Making a late payment, going over your credit limit, failing to pay annual card fees or even making a late payment on an unrelated credit card account can flag your account and result in your APR being assigned to the standard APR for your credit card company.
Standard APR
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Standard APR is the interest rate you will be charged after your introductory APR period expires, or if you cause your introductory APR to go up by violating the terms of your cardholder agreement by making a late payment, going over your credit limit or making late payments on other credit accounts. Your standard APR and any important information about rate changes are listed in your cardholder agreement. In addition, many credit card companies are known to pull their customers' credit and raise interest rates if they find the customer is making late payments on any other credit accounts, even if those accounts are not related to the customer's credit card.
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