Posted on Sunday, 25th July 2010 by Rebecca Ortiz
APR is an abbreviation for Annual Percentage Rate, which is basically another phrase used to describe a credit card‘s interest rate. Every purchase made with a credit card gathers interest that must be repaid eventually. For example, a purchase made with a card that has an APR of 5% would cause 5% of that purchase to accumulate in interest.
Thus, a $100 purchase with such a card would cause a debt of $105. Some credit cards offer grace periods that give the cardholder a specific period of time before any interest is charged on a purchase. Before applying for any credit card it is best to learn and understand the various aspects of the APR and how it is calculated.
Varying Calculations
Unfortunately, every credit card company uses a different method to calculate the APR> However, they are required by law to specify the APR and the methods used to calculate it as well. New cardholders will usually receive this information in a small booklet that arrives with the credit card in the mail. The credit card company is also required to resend this booklet every time the card’s interest rate changes.
Is it Variable or Fixed?
Perhaps the most important aspect of the APR is whether it is fixed or variable. If the interest rate is calculated as a variable rate then it is subject to change, depending upon the current state of the economy and a variety of other factors. Fixed interest rates are much more steady and it is possible for them to remain steady during economic troubles and other circumstances that would normally raise a variable rate. An applicants credit score has the greatest impact on whether or not they receive a fixed rate, as individuals with better scores will usually be approved for a lower fixed interest rate.
Understanding the Periodic Interest Rate
The APR is divided by the number of billing periods in a year to calculate the periodic interest rate. For example, an APR of 24% would be divided by 12 in most cases (since there are 12 months in a year and thus 12 billing cycles). This would make the periodic interest rate 2%. The periodic interest rate is then multiplied by a portion of the outstanding balance in order to calculate the periodic interest rate for the current month. It is important to note that different card companies use various methods to calculate how much of the total outstanding balance is charged the periodic interest rate. Thus, every cardholder should enquire with their credit card company about the methods that are used to calculate interest, both periodically and annually.
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