Why Your Credit Card APR Matters

Tuesday, July 8th, 2014

Credit cards come with lots of terms attached. Most of the time, those little pamphlets with the fine print end up in the recycle bin, unread. Wading through pages of terms and conditions isn’t most people’s idea of a good time—and besides, all that legal language is hard to take in.

But there are a few credit card terms it’s important to understand. One of those is APR, or Annual Percentage Rate. This is one of the most common credit card terms, and one of the least understood. Here’s a look at what an APR is, how it affects your finances, and what to look for when you’re in the market or a new credit card.

What is an APR?

An Annual Percentage Rate (APR) is the annual cost of taking out a loan. You may not think of your credit card balance as a loan, but that’s what it is. The credit card issuer charges interest on any balance that isn’t paid off within the grace period for purchases. How much they charge is based on the APR. If the APR is 12%, that shakes out to 1% a month. That means one percent of the balance carried over each month will be charged back to you as interest on the loan.

As you can quickly figure out, the higher your APR, the more interest you’ll be charged. A 0% APR means you will just repay the amount of your purchases, but a 19% APR means you will pay 19% interest, over the course of a year, on whatever part of your balance you don’t pay off.

Calculation methods

Different credit card companies have different ways of calculating interest. Some compound interest daily, some monthly. The method of interest calculation will be printed in the terms and conditions of any credit card you apply for.

Most credit card companies offer a grace period of 21 to 30 days to pay off new purchases before interest begins to be charged. So, if you pay off your purchases each month in full, by the due date, you may not have to pay any interest.

However, if you are already carrying a balance on old purchases, the grace period on new purchases may be waived, and you may start to incur interest right away on anything you buy with your credit card.

The takeaway

No matter how your credit card calculates interest, how long your grace period is, or whether you make it a habit to carry a balance on your card, it’s important to have the lowest APR possible. You may think it doesn’t matter, as you will pay off your balance in full on time each month. But if something unexpected comes up, such as job loss, illness, an expensive home repair, or simply a vacation that causes you to forget a payment, you’ll be glad if you have a low interest rate.

When looking for a new credit card, there are several factors to take into account: rewards, credit limit, perks – but finding one with a low APR should be at the top of your list.

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