You’ve probably seen the term Annual Percentage Rate (or APR) used in ads, offers in the mail or your credit card statements. But what exactly is an APR? And how does it affect you?
What is an Annual Percentage Rate?
The Annual Percentage Rate (or APR for short) is a number that credit card companies use to calculate interest on your outstanding balances. You can think of it as the price you pay for borrowing money on your credit card.
How does APR work?
Some credit cards have grace periods for new purchases. Those credit card companies will not charge you any interest on purchases if you pay your entire new balance off by your payment due date each month. The grace period is simply an interest-free window within the billing cycle. If you decide to wait until after the grace period to pay off some or all of your credit card balance, you will pay the agreed-upon interest rate (APR) on that outstanding balance. Remember that not all credit cards have grace periods, so check with your credit card issuer to see if you qualify.
How is APR set?
Credit cards with variable interest rates typically use an index, such as the Prime Rate. With the Prime Rate as a benchmark, a percentage margin is added to get a credit card’s APR. If the Prime Rate index changes, a credit card with a variable rate will change with it. This means that if the Prime Rate goes up, your credit card interest rate goes up. If the Prime Rate goes down, your interest rate goes down until you hit the minimum APR in your credit card terms.
You can see the current Prime Rate and track changes in the Prime Rate over the last several years to get a better idea of how variable interest rates may be changing.
How is APR used to calculate interest?
Most banks calculate interest using a formula to determine a daily or monthly periodic rate. To find a daily periodic rate, APR is divided by 365 days in a year. That figure is then multiplied by an outstanding balance to determine interest owed on a given day.
How can you find your APR?
You can find your credit card’s APR on your monthly credit card statements. You can also get it by requesting a copy of your APR information through your credit card issuer.
How can knowing your APR help you?
Your credit card is a tool. And understanding your APR can help you use that tool to make more informed purchase decisions, better manage your balances, and ultimately build a better financial future.