The annual percentage rate (APR) is a term that is commonly associated with credit cards. Oddly enough, the average cardholder doesn’t understand the meaning of this credit card term in relation to payments. So what exactly is an APR and how does it impact how much you pay on your credit card each month?
What is an Annual Percentage Rate (APR)?
The annual percentage rate is the interest rate charged on a credit card balance. However, the rate isn’t charged annually as many think. Instead, it is a fee applied each month that there is an outstanding balance present on the account and expressed in a standardized, annualized method.
For example, let’s say your credit card has an 18% APR. If this APR is the only rate listed then you reduce the annual rate to a monthly figure by dividing the percentage by 12. In this case, you get the monthly interest rate of 1.5 percent.
Now, let’s suppose you purchased an item for $500 last month and you have yet to pay on the balance. At the end of the month, you will owe a $7.50 finance charge ($500 x 0.015). This means, based solely on your 18 percent APR, your total amount due will be $507.50.
Credit Card APR Types
Another piece of information many cardholders don’t know is that there are many credit card APR types that exist, depending on the type of balance carried on the credit card.
Annual percentage rates could be applied for purchases, balance transfers and cash advances. But typically the most expensive credit card rates are those associated with the default APR, which usually goes into effect if you default on your credit card terms by making a late payment or exceeding your credit limit.
Since there are a number of ways that an APR can be charged, it’s important to review a credit card application thoroughly to determine what fees might be implemented on your contract. This way, you can make informed decisions on your credit card use and avoid higher fees unnecessarily.
Arming yourself with this knowledge gives you the power you need to ensure you pay the least amount possible to carry a credit card.
This article is part of the Go Banking Rates Financial Literacy Movement, helping Americans get smarter and grow richer. Take our credit card quiz to test how knowledgeable you are!
Provided by Go Banking Rates