What Does APR Mean When Receiving a Credit Card From a Company?
When shopping for any form of credit, you will come across the term "annual percentage rate," or APR. The Truth in Lending Act requires all credit providers to state this number on their credit products. Understanding how the APR affects your credit will help you choose the most affordable credit card for your needs.
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Significance
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The APR represents the cost of using the credit card as determined by a yearly percentage rate. This number helps you compare credit cards, because all APRs are calculated yearly, whereas interest rates can be calculated daily, monthly or yearly. The APR does not include option fees, such as those you would pay for using the ATM, getting a cash advance, making a balance transfer or paying your bill late. This number provides a standardized way to view the cost of credit when making credit decisions.
APR and Finance Charges
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When you receive a credit card billing statement, you will see two numbers representing what you pay in interest: the periodic rate and the APR. The periodic rate is a monthly or daily charge. Your credit card company finds a monthly periodic rate by dividing the APR by 12. This number is then multiplied by the average daily balance over the past month to figure out the amount of the finance charge. If you have a daily periodic rate, your credit card company divides the APR by 365, then multiplies this by the average daily balance and the days in the billing cycle to determine the finance charge.
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Changing APRs
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Credit cards often have a variable APR. This means the rate can change throughout the year. In these situations, you may start out with a low rate, only to have it go up as you own the card, making the card more expensive than one with a fixed rate. The APR on all cards can go up as long as the credit card company alerts you to this fact in writing. Some will increase your rate if you have a late payment, while others will increase your rate to follow national interest rate trends.
Shopping for a Card
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You may think that the card with the lowest APR represents the most affordable card for your needs. This might be true, but you should compare all other features when shopping for credit cards. For example, if the card has a variable rate, you may only be given the low APR for a few months. Some cards with low rates have high fees for other services, like ATM use or late payments. Others charge an annual fee just for the privilege of using the card.
Low APR Offers
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Credit cards often entice new customers through limited time low APR offers. These offers, which may even include 0 percent APR periods, may provide a way for you to work yourself out of debt without paying high interest rates. When considering one of these offers, always read the fine print. Paying your bill even a day or two late could mean your introductory period is canceled and you have a card with a high APR. You may also pay a fee for transferring a balance from a high-rate card to the new one with the low introductory rate.
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