Annual percentage rate? What does that even mean? This is what APR stands for—most people don’t even know what the letters refer to, so consider yourself semi-educated already! But, there are some important things to understand about APR, so that you don’t find yourself in financial trouble.
It is not just a simple “interest rate,” there is more to the story. Let’s consider some of the finer points of APR, so that you can really consider yourself more of an expert, and you can make more intelligent and informed decisions when it comes to credit cards and all of your finances.
Why Your Credit Score Matters
When it comes to APR, the lower your credit score is, the higher your APR will be. This means that you will pay higher interest as a penalty for having a lower credit score. You can avoid paying any interest, in most cases, by paying off your balance in full each month before the due date, but few people manage to do this and are then subject to whatever the assigned APR happens to be. Keeping your credit score high and your balance low can minimize the effects of any APR on your finances!
It’s Not Always Clear Cut
For one card, there may be several different APRs that are applied, depending on the circumstances. For example, there may be one APR assigned to purchases, and another to balance transfers. Still another APR may be used if you use a convenience check, take a cash advance or make a late payment. Read the fine print to find out exactly how much interest you will be paying for the debt on your credit card, depending on what kind of debt it may be.
Many credit cards offer an introductory APR, often very low, or even 0%, but you should know exactly how long this lasts and how the interest will be calculated when the introductory period ends. For example, if you do not pay the balance in full by the end of the introductory period, will you be responsible for all accrued interest or just interest on the remaining balance? An important distinction, one that could cost you hundreds of dollars if you do not understand what you are getting into.
Don’t Forget About the Fees
Annual percentage rate only includes the interest that you will pay, spread out over the course of a year. If there are any annual fees, late fees, or balance transfer fees, then these are not figured into the APR, meaning you could be paying even more than you think over the course of the year to have the privilege of using the credit card. Be careful when you sign up—know what you are getting into.
APRs Can Change
An APR is usually a variable rate, one that depends on the current prime rate. So, the APR that lures you to a specific card may change, and you may get little or no notice of the change. You might end up paying more than you planned in interest rates. Certain legislation has made it more difficult for lenders to raise the rates without giving you adequate notice, but this can be difficult to enforce. Pay attention to your statement, and take notice if anything changes.
Avoiding APRs Entirely
One way to avoid having to truly understand APRs or have to deal with them is by paying off your balance in full each month, and not having to accrue any interest. This is definitely the smartest way to use a credit card, and what experts recommend that you do. And, when you are using a credit card with great perks or rewards, you are essentially going to get those perks for free!