What is APR? what you need to know
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APR stands for Annual Percentage Rate and is an essential concept for anyone who borrows money to understand. It is the total interest rate paid annually over the life of a loan. The APR plays a crucial role in many consumer financial products, such as credit cards, auto loans, and mortgage loans. Since the APR for credit cards is typically much higher than the APR for other types of loans, knowing the APR on a credit card is crucial.
What is the APR on a credit card?
A credit card’s APR determines the interest paid on borrowed money for a period longer than the billing cycle of the credit card. Most credit cards do not charge interest on purchases if the balance is paid in full by the due date. A credit card’s APR is based on many factors, including the creditworthiness of the borrower and the issuing bank. A cardholder can find their credit card APR on their bank statements.
How does the APR work?
The APR tells you how much it costs to borrow money. The APR is based on the interest rate and any fees charged by the lender. It is expressed as a percentage.
A lender – usually a bank – is responsible for setting an APR. Typically, the APR is based on the US Federal Reserve Rate, which is the best interest rate that lenders offer their most reliable customers. The banks then calculate a profit margin on top of the prime rate. Typically, the better a borrower’s credit rating, the lower their APR.
A credit card APR can be 15% or less for cardholders with excellent credit, or as high as 30% for cardholders with poor credit.
What is the difference between APR and interest rate?
APRs and interest rates are related but have slightly different calculations. The interest rate refers to the amount of money that the lender is asking for the loan. The APR takes into account the total cost of the loan.
For example, the card issuer may charge a 20% interest rate for a $1,000 cash advance on a credit card. If the card issuer also charges a 2% cash advance fee, the APR – the actual cost of borrowing the money – is 22%.
If there are no other fees associated with borrowing, there is no difference between the interest rate and the APR. In most cases, the APR is higher than the stated interest rate for an account.
What is the difference between the APR and the APR?
Banks use either a daily or a monthly rate for the credit card’s APR. Dividing the effective annual rate by 365 gives the periodic daily rate. Dividing the APR by 12 gives the monthly recurring rate. The lender adds the accrual to the credit card balance. This accrual rate is called the effective annual interest rate. This interest rate is the actual interest rate charged on a financial product as a result of compounding the loan over a period of time.
Good to know
A borrower pays more when interest is compounded daily instead of monthly. This difference is important for cardholders who don’t pay out their balance in full every month. Paying an installment on a credit card balance at the beginning of the billing cycle rather than at the end can save interest if compounded daily.
What Are the Different Types of Credit Card APRs?
Other types of APRs related to credit cards are also important to cardholders.
An introductory or promotional APR is usually extended to a new cardholder for a period of time. This APR is often lower than the regular rate, which is why many credit institutions often offer it, enticing people to apply for a new card. An introductory APR can sometimes be as low as 0%. The card will revert to its regular APR once the introductory period ends or if the cardholder fails to make payments on time.
Credit Transfer APR
A balance transfer APR is similar to, and sometimes used in conjunction with, an introductory APR. Fund Transfer APR is a low 0% APR that applies to funds transferred from another credit card to the Card. The rate is fixed for a specific period of time or until a cardholder fails to make payments on time.
Induction and balance transfer APRs are typically set during the induction or balance transfer period. The tariff is locked and does not change until the period ends or a cardholder fails to make their payments on time. Except during introductory and balance carryover periods, most credit cards do not have a fixed APR. The tariff may remain the same for a longer period of time, but that just means the card issuer hasn’t changed it.
Most credit cards have a variable APR. A variable APR changes according to the base rate that lenders charge their best customers. A cardholder’s APR may increase if the prime rate increases.
The APR is the rate used for all purchases not made during an introductory period. The effective annual interest rate is usually variable.
Cash advance APR
Cardholders borrowing cash from a credit card must pay a cash advance APR. It is usually higher than the APR and applies to the cash advance until the balance is paid off.
If a cardholder is more than 60 days overdue on a payment, the card issuer may impose an effective penalty rate. A penalty rate can be up to 29.99% and can apply to all purchases made on the card, including additional purchases. A card issuer typically does not lower the APR until a cardholder has a history of making payments on time.
What is a good APR?
A good APR is one that is lower than the average interest rate. These APRs are typically reserved for customers with the highest credit scores.
The low end of the APR range is a good interest rate for someone with excellent credit. For example, on a credit card with a variable APR between 12.99% and 24.99%, an APR of 22% might be a good rate for someone with bad credit, but would not be a good rate for someone with good credit. It might not be as good as the lowest rate, but it’s lower than the 29.99% that some cardholders with bad credit have. For this reason, it’s important to compare credit card APRs before applying for a new card.
The APR plays a crucial role in how much it costs to borrow money. Credit cards can get particularly expensive when the APR is high and the balance isn’t paid off in full each month, so it’s important to know what the APR on a credit card is. Cardholders with a good APR should always make payments on time to keep their APR as low as possible. Because credit cards typically have a variable interest rate, a card issuer may choose to charge an APR if a cardholder is more than 60 days past due on a payment.
FAQHere are answers to some frequently asked questions about credit card APRs.
- What is 24.99% APR on a credit card?
- An APR of 24.99% means that if a cardholder carried a $100 balance for a year, they would incur nearly $25 in interest to pay that $100. Of course, no one has the same balance for a year, but this shows how expensive a card with a high APR can get if you don’t pay for it in full every month.
- Is 22% APR high for a credit card?
- Some credit cards have an APR as low as 12.24% for those with the best credit ratings. So 22% is a high APR for someone with excellent credit. It’s not high for someone with good to bad credit.
- Is 24.99% APR good for a credit card?
- An APR of 24.99% is high for someone with good to excellent credit, but it’s equivalent to an APR for fair to bad credit. It’s not the worst APR, but it does get pricey when the cardholder has a balance.
- Do I pay the APR if I pay on time?
- If you pay off all your credit card balances on time each billing cycle, you pay no APR. Typically, APR is only accrued on outstanding balances. If you don’t pay out the full balance and instead keep a balance from month to month, you’ll pay the APR on the remaining amount.
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