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If you have a credit card, mortgage or loan, it’s likely you’ve seen or read about your annual percentage rate, more commonly referred to by APR.
In this guide, we’ll be specifically talking about APR for credit cards. At some point, you’ve likely seen your APR on monthly statements you receive.
This annual percentage rate is important to know and understand, so make sure you take the time to understand it so you can make better credit decisions.
Calculating APR can be confusing for someone that doesn’t understand how it works.
Understanding Annual Percentage Rate
APR is an annual representation of your interest rate. When you’re deciding which credit cards to choose, APR allows you to compare how expensive a transaction will be on each individual credit card.
When it comes to calculating APR, there’s 2 big things you need to understand, that is how APR is applied and how it is calculated.
How Does APR Work?
It depends on how you use your credit cards. If you only make purchases and you always pay off your balance, you won’t owe any interest.
Now, if you carry a balance on your credit card, you’ll be required to pay the interest you agreed upon with your credit card lender.
How Can I Calculate APR?
The majority of variable interest rates start by using an index, such as U.S. Prime Rate, then they add a margin. The end result is the APR.
Variable rates can change if the index changes and some banks do offer a non-variable APR also.
How To Determine What You Know
The banks use a formula to determine how much interest you pay on your outstanding balance. They calculate using daily and money periodic rates, these can vary depending on the credit card you’re using.
Some accounts have multiple APRs, so this calculation may be applied for each one.
Your statement will give you more information on how you can calculate the balance subject to your interest rate.
- (Annual Percentage Rate) Divided By (Days In The Year) = (Daily Periodic Rate)
- (DPR X Days In Billing Period) X (Balance Subject To Interest) = (Interest Charged)
Different Types Of APR
There’s a number of different types of APR.
- Purchase APR - This is the rate applied to credit card purchases.
- Cash Advance APR - This is the rate you’ll pay for cash advances which are typically higher, special checks from lenders would be included.
- Introductory APR - Also called a Promotional APR, these feature a lower APR for a special amount of time. It can be applied to transactions, cash advances, etc.
- Penalty APR - This is often the highest APR. This one is applied when one violates the card agreement.
Credit Cards And APR
Before you choose any credit card, you should be thinking about the APR. Remember,
- You can use the APR to determine which credit cards would be best.
- Many lenders can’t change the APR for the first 12 months. Make sure you’re not moving to a high APR after this 12 month period.
- When companies change terms, they usually give you at least a 45 day warning.
- Always make sure you read the fine print on a credit card company’s APR details.
How Do I Get A Good APR?
By now, you know how important APR is, so how can you ensure you get the best APR possible? There’s two main factors that are going to determine what APR you’re offered. They are;
- Your credit
- The credit card you choose
It’s much easier to get a great annual percentage rate when you have great credit. In general, the better your credit is, the better APRs you’ll be offered.
If you’re finding it difficult to get a low APR and you have bad credit, that’s likely why you can get a good rate.
We have several articles that walk you through the process of building your credit, be sure to check them out.
Now, the other major factor that determines what APR you’ll get it is the credit card itself. Some credit cards have great APRs and these are generally for those that have great credit scores.
If you have a great credit, you have a lot of options, so make sure you shop around to see what annual percentage rates you can get.
While you can sign up for free sites like Credit Karma and Credit Sesame to get credit card offers, you can also visit the credit card lenders main website to apply.
If you’re finding it difficult to find the exact card you’re looking for, take the time to call customer service.
Every major credit card lender has a customer service phone number and they’ll help you find the card you’re looking for.
Furthermore, some credit cards may not be promoted, so there could be a few hidden gems that everyone doesn’t know about with low APR offers.
Many people decide to use credit cards because of the rewards and bonuses. If this is you, you likely have plans to use your credit cards a lot.
For those of you that will be using your credit card a lot, APR matters. The lower the APR, the better.
Take it from some experts that know, high APRs can add up to a lot after 12 months of usage. If you’ve never paid attention to your credit card APRs, today is a great time to start.
If you’ve owned a card for 12 months, go back and look at your statements. The cost you’ve had to pay may just surprise you.
If you’re looking to get your first credit card, it’s going to be tough getting a great APR, unless you have great credit. Most people that don’t have credit cards usually have lower credit scores.
None the less, you’re going to get the opportunity to build your credit. It takes time to build your credit and get good APR offers.
As we said before, the better you can build your credit, the more lower APR offers you’re going to receive.