Annual Percentage Rate
The Annual Percentage Rate (APR) is the fee you must pay your financial institution for borrowing cash for them. You will be charged an APR for using a credit card. APR is expressed in terms of a year, however, credit card companies express it in monthly terms. The monthly expression is not different from the yearly expression the calculation is still the same. The annual percentage rate determines the amount you will pay as the interest rate on your credit card. The lower the APR the better it is for the credit card holder.
Types of APR
- Purchase APR
This APR applies to all the purchases you make with your credit card. This type is one of the most common APR.
- Penalty APR
This is the interest rate charged to your account when you miss your minimum payment for more than 60 days. This rate is higher than most interest rates and it accumulates quickly.
- Balance Transfer APR
This is the rate you pay when you transfer your balance from one credit card to another. Most people like to transfer their balance from an old credit card to a new one. This comes at a cost which is popularly called balance transfer APR.
- Cash Advance APR
You are charged this rate when you use your card to withdraw funds. Unfortunately, the bank will start charging this rate the moment you withdraw the funds. There are no grace periods with the cash advance APR. Talk of grace periods on credit cards, what are they?
- What is APR Grace Period on Credit Card?
The grace period is a free period given by banks to their credit card users. Within this period, you will not be charged any APR. If you can pay back your balance within this period, you will not incur any further debts. No interest will be charged on your account within the period. However, when the period is over, you will start paying APR on your credit card balance. Hence, the best time to pay off your credit card balance is the grace period.
- What determines the APR on your credit card?
Your creditworthiness determines how much you will pay as the interest rate on your card. Your creditworthiness is determined by your credit score. Your FICO credit score tells a lender how eligible or ineligible you are for credit. A lower credit score reduces the confidence of the lender to grant you credit. This makes it difficult for a lender to offer you a loan. This is because they consider granting you a loan as risky. This makes them grant people with bad credit scores loans with high interest rates. This means that if you have a low FICO credit score, you will be charged a high APR on your credit card.
- How do I lower my credit card APR?
APR has a direct correlation with your bill. A higher APR means you will pay more as interest on your card. This also means your bill will go higher. Fortunately, you can take certain steps to lower your APR. You can consolidate your credit card debt if you are overwhelmed by the increasing debt. You can start paying regularly and ask the credit card company to review your rates after making several regular payments.
- How to calculate credit card interest rate
There are three steps in calculating your credit card APR. The first thing to do is to convert your annual APR into daily APR. As we mentioned earlier, APR is calculated for a year period. However, interest rates are calculated daily so you will need to divide your APR by the number of days in the year. That will be 365 days. The result you will get is the periodic interest rate or the daily periodic rate.
The next thing to do is to estimate your average daily balance. You will be able to do this by looking through your card statement. Your card statement includes the balance you carried from the previous month and the purchases and payments you make in the new month. When you make payments, you balance reduces and when you make purchases, your balance increases. You can use the difference to check the balance you have for each day. You will first record the balance you brought in from your previous month. Then you will deduct your new balance after making a purchase or payment the next day. This will help you to record the balance for each day. You will then add all the balances for the days recorded and divide by the days on your statement. Thus the number of days you made a transaction. The result is termed as average daily balance.
The final step is to put it all together. You will multiply your daily periodic rate by your average daily rate. You will then multiply the result by the total number of days on your statement. The result is the interest rate. This may differ if your credit card company compounds interest.
This calculation reveals that the APR is only a part of the interest rate and not exactly the interest rate.
- How does credit card interest work?
Interest is charged to your card only when you carry a balance from your previous month to the new month. This means that you will not be charged any interest if you pay your balance in full at the end of every month. Making payments often also shrinks the interest rate on your card.