What Is APR

When shopping for a credit card, one of the first questions you should ask yourself is “What is APR?” Because APR, or the annual percentage rate, can affect how much money comes out of your pocket if you fail to pay your bill in full, it is an important number to understand when it comes to your card choices.

A lower APR can result in a lower credit card balance.

APR is the annual percentage rate on a credit card. In other words, it is the amount you will pay in interest charges per year. In its most simplistic form, you can figure out how much you pay per day, take the APR divided by 365. Unfortunately, the true amount you will pay a credit card company is more apt to compound the cost of interest, meaning the cost of having credit will be greater than just a simple interest charge on your purchases, particularly if you do not pay off your balance in full each month because you will be charged interest on any interest charges that are not paid in the preceding month, and any penalties and fees will be in addition to the annual interest calculation.

The APR on a credit card can vary due to several things. If you have a good credit rating, you will probably be offered a card with a low APR. However, if you are applying for your first card or have a poor credit history, your APR will be much higher. The rates can vary anywhere from a 3 percent rate to upwards of 30 percent.

The APR on each card can be figured differently, so be careful to read all of the fine print before signing up for a card. Some credit card companies charge a fixed interest rate, meaning your APR can change, but only with a specified number of days notice. Other cards have variable interest rates, which change based on how interest rates are doing in general. Many variable rates are the prime rate plus 3 percent. The prime rate is the standard by which interest rates are measured, and it can be found in a newspaper’s business section or online.

If you do not pay your credit card bill in full each month, the APR can greatly affect how much money you give your credit card company for the short-term use of their money.

For example, say you have $1,000 charged on a credit card with minimum monthly payments of only $20. Sounds nice, right? You may think you can afford that payment each month, with little effect on your pocketbook. But let’s look closer and figure out what it really costs to pay only the monthly minimum.

With a 15 percent APR, and making only the minimum payments, it would take over six years to pay off your charges, and with an additional hit of $546.18 in interest over those years going to the company. Your $1,000 charge just turned into over $1,500.

If you have bad credit or frequently do not pay your bills on time, you may have a higher annual percentage rate, say 21 percent. At 21 percent interest, that initial bill will take you over nine years to pay, while more than doubling the amount paid. You would pay in over $1,200 in interest for that $1,000 purchase. This does not include any annual credit card fees, late charges, or over limit fees that may be charged against your account during that time, and remember, those extra fees will also accrue interest charges.

However, if you have a good credit history and shop around for a low-interest rate card, you may have an APR of only 7 percent. At this rate, it will only take just under five years to pay that bill, with only an extra $177.55 in interest charges coming out of your pocket.

Of course, the three scenarios above do not take into consideration that you are probably putting additional purchases onto your card at the same time. Therefore, the amount paid to the APR will increase, as will the amount of time it takes to pay the card off. A high interest card that is not paid off quickly can result in a lot of consumer debt. This is why it (literally) pays to shop around for the best deal, and to keep your credit history clean.

Even if you qualify for a wonderfully low APR, be sure to check the fine print. You need to find out what is the interest for other scenarios, not just that of not paying the balance off in full. Find out what is the APR for the following items:

• Learn the actual APR after the “low introductory” rate expires, which is often anywhere from 90 days to 1 year.
• Check out the default rate in case you fail to make a payment on time (even one day late on a payment can cause the APR to rise significantly). Failure to pay your existing credit cards on time can also affect the interest rate you will pay on any new credit cards you apply for.
• Make sure you know the APR for cash advances you may take on your credit card. These too are often much higher than the quoted rate.
• Checks issued from the credit card company often have a higher annual percentage rate than purchases put onto the credit card.

Card issuers change their APRs frequently based on the Federal Reserve Rate. To research the most current APR for a specific card you need to either call the customer service department or check the current rate on the card issuer's website. You can quickly check the current APRs and benefits of over 1,300 credit cards by using the index chart at LowCards.com. Just click on the card you want to check and the LowCards.com index chart will automatically take you to the card issuer's website.

Armed with this knowledge, you can make sure you do not pay more than you should for groceries, gas and other necessities. Be sure to check the grace period for your credit card, which is how long you have before the company starts charging the interest. Many are as low as 15 days.

Asking yourself “What is APR?” and checking it out before applying for or using a credit card can save you a lot of money in the long run. Credit card offers are not as good as they may seem at first sight. Do not let yourself get into debt unnecessarily.

• Is Debt Consolidation a Good Idea
• How Can I Improve My Credit Score Fast
• What to Say When You Can't Pay
• How Does Debt Consolidation Work
• What is a Good Credit Score

• American Express Black Card
• What Is APR
• Sears Credit Card
• Do It Yourself Card Credit Debt Settlement
• Credit Card Generator

• Always Read Contract Terms and Conditions
• Airlines Credit Card
• 0%25 Balance Transfer No Annual Fee Credit Cards
• Interest Rate
• MBNA 0 APR Credit Card Comparison