What Is APR?
If you ever apply for a credit card, there is something that you will need to understand. That is APR. Effectively, APR is the average rate of interest you will pay annually for the debt that you amount on your credit card. APR is applied to all loans which you take from a bank or financial institution. Credit card debt is like all other loans, it needs to be paid back. This rate will affect how much you pay back on top of what you spend.
Types of APR
There are different types of APR. As a credit card customer, you will likely use your credit card for different purposes. You may use your credit card to purchase your weekly groceries. You could be a person who uses their credit card for larger expenses such as booking a vacation. Perhaps you use your credit card to supplement your paycheque and facilitate of a cash advance. Therefore, you should be aware of how your rate will change, depending on your use.
Many credit card providers will offer a 0% APR rate when you first apply. This is an attractive offer for many people. Banks and financial institutions hope to attract the attention of potential customers by offering low rates for the first year. However, following the end of this period, you will become subject to regular APR.
The standard level for a credit card is purchase APR. This is applied to purchases that you have made on your credit card which you haven’t paid off in full before the grace period ends. For example, if you make a purchase for $700, and only pay off the $500, the remaining $200 will be affected.
As a credit card customer, you could find yourself liable to penalty APR. This occurs when you fail to meet even the minimum payment on your credit card debt. When you fail to meet this benchmark, you will suffer the consequences of a higher APR rate. Similarly, if you use your credit card as a cash withdrawal at an ATM, you will also face a higher APR rate. Therefore, before applying for a credit card, it is important to understand the rate on your card. Make the right choices for your purchasing habits.
How APR Is Calculated
In general, APR is calculated by the US prime rate. This is the best rate that a bank will offer its most reliable customer. Banks will then charge a margin of profit on top of the prime rate. When you have a higher credit score, you will generally be offered a lower APR. This is because a bank or financial institution will have a stronger belief that you can pay back any debt incurred. Typically you will be offered a daily or monthly periodic rate. Calculate a daily periodic rate by 365 will give you your result. Calculate your monthly periodic rate by 12 will also give you your rate.
It is important to be aware of your rights as a consumer. Banks and financial institutions must comply with specific rules regarding APR. For example, lenders can’t change your contract in the first 12 months. This is unless you are under a promotional rate or have broken some of the terms and conditions. Your credit card provider must also provide you with 45 days notice before they change your APR.
Knowledge is power, and understanding the terms and conditions will ensure that you are an informed customer. Finding a credit card provider who will provide you an APR level to suit your needs is a major step in taking the reigns of your personal finances.