Saturday, 1 June 2019

Credit Card APR - How Do They Work

Credit Card APR - How Do They Work

Are you a credit card beginners or you have been using a credit card for a long time but when it comes to something called credit card APR, is seem very confusing. But don't worry because in today article what I will be talking about today is a question that keeps coming up anytime I open my email

The question goes like this

  • What is APR, 
  • How does an APR work? 
  • Do I get to choose my own APR, 
  • Does my APR affect my credit score?

Let jump in

APR stands for Annual Percentage Rate, and it's used to calculate how much interest you are going to pay each month. I know that's misleading because it says annual, but stick with me here

If you pay back your entire credit card balance on time each month not just the minimum then you won't pay any interest so APR is not going to matter to you at all

Read: How Do Credit Cards Work

This is what we should all be doing, credit card companies call people like this freeloader because you never let them get an extra penny off of you

  • Freeloaders: 
  • Always pay the full balance
  • Never pay interest fees

But if you choose to carry over a remaining balance from one month to the next month, the APR is a big deal to you. You are going to be called a revolver because just like a revolving door you are going to let credit card companies make more money off you each month

  • Revolvers:
  • Only pay the minimum
  • Pay interest
  • A major source of income for a credit card company

Now, the APR is determined by your credit card company based on your credit score and your credit reports when you apply for credit. The better your credit score is then the lower the APR is going to be which means you will pay fewer interest fees over time

But the lower your credit score is then the higher your APR is going to be which means you will be paying more interest over time.

If you are not sure what your APR is you can check out the fine print on your credit card statement or you could just call up your credit card issuer and ask them over the phone

Even though APR stands for annual percentage rate, the credit card companies actually calculated daily and then they add up all the day in the month and put that number on your bill

For purchases that you made with your credit card in your billing period the credit card company is basically going to see how much money you owed on average each day from the first day of the billing period to the statement closing date on the billing period and then that is going to get multiplied by your daily APR

  • Which is basically your APR divided by 365 days, that is going to tell them how much to charge you each day so they would take that and multiply it by how many days are in the billing period and that is the number that they charge you in monthly fees

  • Average daily balance X daily periodic rate X number of days in period = amount of interest charge

If this formula is confusing for you then just make sure that you understand the concept. When you are shopping around for credit cards you really want to make sure you build up your credit as much as you can so that you can qualify for the best interest rate, that means that you will get the lowest possible APR, because remember the average APR is about 15 - 20%

If you can get an APR that's lower than that it's pretty good. if you get something that is higher than that it's not so good.

I hope this article helps you have a better understanding of what credit card APR is and how it works, but if you still have questions you can definitely drop your comment below

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