When you are looking for a credit card, you will hear a lot about APR. But what is APR? How does it work?
Let’s read below.
APR stands for Annual Percentage Rate, and it’s the annual interest rate charged on your outstanding credit card balance. It’s important to understand how APR works because it can have a big impact on your overall credit card costs.
The APR on most credit cards is variable, which means it can change over time. Usually, the APR is based on the prime rate, which is the rate at which banks lend money to their best customers.
Interest will be added to your credit card balance if you keep a balance from month to month. The interest charge is based on the APR and the amount still owed on the card.
Here’s an example: Let’s say you have a credit card with a balance of $1,000 and an APR of 18%. If you make no additional charges and don’t pay off any of the balance, after one year you will owe $1,180 in interest charges. That means the total cost of carrying that $1,000 balance would be $1,180, or 118% of the original balance!
Of course, most people don’t keep an unpaid balance on their credit cards from month to month. But it’s still important to be aware of how APR works so that you can make informed decisions about using your credit card.
There are a few things to keep in mind when it comes to APR.
Different cards have different APRs. For instance, a credit card with rewards might have a higher APR than a simple card.
Your APR will also depend on your personal creditworthiness. If you have good credit, you’ll likely be offered a lower APR than someone with poor credit.
APR can change over time. If you have a variable APR, it will fluctuate based on the market. Fixed APRs will stay the same for the life of the loan.
You may be able to negotiate your APR with your credit card issuer. If you have good credit and are unhappy with the interest rate you’re being charged, reach out to your issuer and see if they’re willing to lower it.
Knowing all of this, let’s take a look at some of the benefits of having a lower APR.
-You’ll save money on interest: This one is self-evident. The lower your APR, the less interest you’ll pay on your outstanding balance. This can add up to significant savings over time, especially if you carry a balance from month to month on your card.
You’ll have more money to put toward your principal: If you’re paying less in interest, you’ll have more money available to put toward your principal balance. This can help you pay off your debt faster and save even more money in the long run.
-You may be able to qualify for a lower interest rate on other loans. Having a low APR on your credit card can be a good indicator of your overall creditworthiness. This may give you negotiating power when it comes to other loans, such as a mortgage or auto loan.
-You may be able to avoid late fees. Many credit card issuers charge late fees if you miss a payment. But if you have a lower APR, you may be able to avoid these fees altogether. That’s because some issuers will waive the fee if your interest rate is below a certain threshold (usually around 12%).
The drawbacks of APR
The interest rate you pay on your credit card balance is called the annual percentage rate, or APR. It’s important to understand how APR works so you can avoid paying interest on your credit card balance.
There are a few drawbacks to using APR to finance your credit card purchases.
- First, if you don’t pay off your entire balance each month, you will be charged interest on your outstanding balance. This can add up quickly, and you may end up paying more in interest than you would have if you had paid cash for the purchase.
- Second, if you are late with a payment or miss a payment altogether, you will be charged a late fee as well as an increased APR. This can make it very difficult to get caught up on your payments, and you may end up paying more in fees and interest than the original purchase price.
- Finally, if you default on your credit card payments, your APR will increase dramatically, and you will likely incur additional fees. Defaulting on your credit card payments can damage your credit score and make it difficult to obtain new lines of credit in the future.
How to make the most of your credit card’s APR
In order to make the most of your credit card’s APR, it is important to understand how it works. APR is the annual percentage rate that is charged on the outstanding balance of your credit card. It is important to remember that this rate is applied to your entire balance, not just the portion that you may have spent in a given month.
There are a few things that you can do in order to keep your APR as low as possible.
- First, make sure you pay on time every single month. When payments are late, APRs can go up.
- Second, try to keep your balance as low as possible. The less money you owe on your credit card, the lower your APR will be.
- Lastly, if you have multiple credit cards, be sure to use the one with the lowest APR first. This will help you save money in the long run.
Conclusion
The APR on a credit card is the interest rate that you will be charged on any outstanding balances on your account. This rate can vary depending on the type of card you have, but it is typically between 15% and 30%. If you carry a balance on your credit card from month to month, the APR will determine how much interest you will accrue. It is important to understand how APR works before signing up for a new credit card so that you can make an informed decision about which card is right for you.
