May 2

The Basics of APR

Today, there are literally thousands of credit card companies around. For these companies, competition is stiff. For us, it is both a boon and a band. On the one hand, we have many choices that we are sure to find the right credit card that suits our needs. On the other hand, the many choices can be somewhat overwhelming.

Credit card companies are all saying their credit card is the best, then follow it up by enumerating their credit card’s “exclusive” features. However, the truth is that all credit cards offer nearly the same features; the only difference is that these features vary slightly from one credit card to the next.

For instance, all credit card companies mention APR or the Annual Percentage Rate. APR is the amount (expressed in percentage) you pay annually for your credit card purchases and carrying a balance on your credit card.

The APR determines your ability to pay off your credit card, especially if the credit card carries a balance. The APR is different from one credit card to the next. In addition, the APR also varies from how and what you buy. For instance, if you are planning to use your credit card to make cash advances, keep in mind that the APR on cash advances is the highest.

The APR for a $200 cash advance can be as high as 23%. You do not need a professional to tell you that 23% is a very high interest rate for such a small cash advance amount. The APR on purchases can be high too, though not higher than the APR on cash advances. For instance, an APR on purchases may be 19%. Again, this APR is still pretty high. The high APR is the main reason it is best to use credit cards for emergencies only or for purchases you know you can pay in full when the credit card statement comes.

The APR can also be based on the balance you carry on your credit card on any given month. This is called a tiered APR. For instance, if you have a balance of $0-$2,000 on your credit card, the APR on that may be 14%. If your balance is over $2,000, it may have an APR of 18%. If your credit card has a tiered APR, it is wise to maintain a lower balance on your credit card.

Another type of APR is the penalty APR, which is applied when you are late in paying your credit card more than one time. If you are regularly late at making your payments, your credit card company can raise your APR. As you know, a high APR will affect your ability to pay off your debt. Thus, pay your credit card bills on time to avoid the penalty APR.

The introductory APR is the most common type of APR you will see in most credit card offers. An introductory APR is a significantly lower interest rate on balance transfers and purchases made during the introductory period. If you have a high balance on another credit card with a high APR, you can transfer it to a credit card with an introductory APR.

However, check to see if there are any transfer charges as well as how much. You also need to check the new credit card’s future APR (or delayed APR). The future APR is the APR on the card that kicks in when the introductory APR expires. The future APR is usually high, so check this information out before getting that credit card.

Now you know what APR is and the various types of APRs that the banks and credit card companies offer. Whenever you consider a credit card offer, look at the APR. Choose your credit card carefully.