What Is Credit Card APR and How Is It Calculated?

One important factor that contributes to debt is your credit card APR, so it would pay to know more about how it works.

Everyone is surviving on at least a little bit of debt every day. If you’re in doubt, when was the last time you used your credit card? Well, I think that answered your question in its entirety. You see, the use of your credit card is just another form of getting into debt, but the good thing is that this is debt that you can manage.

After all, the issuer did their due diligence before offering you the LOC on the card. You see, terms like LOC (line of credit) are just some of the terms used in regards to credit cards that you may not understand. The other one is APR, which means the Annual Percentage Rate. So, read on and learn just how it gets calculated.

Credit Card APR

Getting to Know More About APR

You’ve probably met the word APR when you were applying for a new credit card and wondered what it meant. APR or the Annual Percentage Rate is a structure of just how much interest you’ll incur.

It is imperative to pay close attention to the APR when applying for a card. Here, you can compare just how expensive it is going to be to pay off your credit card when the time comes.

How Does It Work?

Since you’ve seen the sneak preview of what APR is, why not get down into how it works? Generally, credit cards have no interest if you choose to pay off your purchased amounts at the end of the month. But, if you carry your debt forward, that’s when the interest starts coming in.

The interest you incur if you carry your debt forward will be the one that you agreed upon with the issuer. Don’t worry about the first few purchases; with those, you won’t incur interest due to the grace period given. It will be on your outstanding balance.

Calculation of APR

The calculation of the interest uses indexing, and then a margin is added. The margin is what the bank charges for interest on your debit/credit. With the two added together, that’s where credit card APR comes from, and the rates change if the index changes.

The formula the issuer/banks use to determine how much you should pay in interest is calculated daily. If your card has multiple APRs, then calculations are applied to all.

Types of Credit Card APR

There are different types of APRs that you should keep an eye out for. They are based on how you use your card.

  • Purchase APR – Where you’re charged for your credit card purchases.
  • Cash Advance APR – If you at some point want to borrow cash from your card, this is where you should carefully look.
  • Introductory APR – Also known as promotional APR (Low-interest rate for a limited time).
  • Penalty APR – And the highest APR today has got to be the penalty APR, which is charged when you go against the agreed-upon terms.

Remember that borrowing cash from your card is quite expensive.

Conclusion

With credit cards being the cornerstone of the American economy, their usage will only grow. Understanding some of the terms used when it comes to them can help you avoid getting into even more debt. Knowing what credit card APR is and how they calculate will ensure that you know how much you’ll be paying on your next payment.