You’ve likely heard of the annual percentage rate, or APR if you have a credit card, but you might not know what is APR on a credit card.
Although they can occasionally vary depending on the credit product, interest rate, and annual percentage rate are frequently used interchangeably. The interest rate and annual percentage rate are usually the same for credit cards.
Every credit card has many moving parts. An example is the Annual Percentage Rate, or APR, which refers to the cost of borrowing via card.
However, the problem with credit cards is that they can have several APRs designated for various types of transactions.
Knowing how credit card APRs work will make you a better-informed shopper who can compare cards more effectively and manage debt.
What is APR on a Credit Card?
An amount known as the annual percentage rate (APR) is used to express the whole cost of borrowing money from a lender.
It’s critical to comprehend how to compute annual percentage rates (APRs) and compare them across card issuers and lenders as you shop around for financing:
The annual percentage rate (APR) on credit cards is the interest rate that the card issued charges you if you don’t pay off the entire balance each month.
It excludes any fees associated with using the card, such as annual fees.
The annual percentage rate (APR) for installment loans includes both interest and other costs.
You can calculate how much the loan will truly cost you annually with the help of the resultant rate.
How to Calculate Credit Card Interest Using APR
Take your Annual Percentage Rate (APR) and divide it by 365 (the number of days in a year). This gives you a daily interest rate.
Multiply your average daily balance (the amount you owe on your credit card on average) by the daily interest rate.
This gives you how much interest you accumulate in one day.
Take the daily interest and multiply it by the number of days in your billing cycle. This gives you an estimate of the interest charged on your credit card for that month.
Break Down of Credit Card Interest
If your APR is 18% and your average daily balance is $1,000:
Daily Interest Rate = 18365≈0.0493%36518≈0.0493%
Daily Interest = $1,000 x 0.000493 ≈ $0.493
Monthly Interest = $0.493 x 30 ≈ $14.79.
Benefits of APR on a Credit Card
The following are some benefits of an APR you can get on a credit card;
1. More Flexible Payments
With a lower APR, you have more leeway in how you handle your credit card balance. You can take your time paying it off without feeling the pinch of sky-high interest.
2. Saving on Balance Transfers
If you’re moving money from one credit card to another, a lower APR on the new card saves you money on that transferred balance.
3. Helps in Emergencies
When unexpected expenses pop up, a lower APR makes it less stressful to use your credit card. You won’t get slammed with crazy interest charges.
4. Credit Score Boost
While it’s not a direct perk of APR, having a lower interest rate can indirectly help your credit score. Timely payments are easier, and that’s good for your credit history.
5. Predictable Monthly Payments
Your monthly payments are easier to predict with a lower APR. It’s like having a set amount you know you need to budget for each month.
6. Introductory 0% APR
Some cards have a zero percent APR for the initial period when you acquire the card. This is great when you are planning to buy something big and want some time before the interest begins.
7. Long-Term Money Saver
For individuals who are often burdened with a balance, low APR credit cards help you minimize costs over time. It’s like a friend watching your wallet.
You should understand the terms and conditions especially, such as the annual percentage rate of your credit card just like any other financial agreement.
Remember that the APR is only applied when you have a remaining amount on your card; hence, if you clear off your monthly statement before it ends, then most of the time there will be no interest charged.