Why Your Credit Card APR Matters

Monday, December 29th, 2014

When searching for a new credit card, many people don’t read the fine print. Distracted by the offers of frequent flyer miles, the promise of no interest on purchases for the first 15 months, or the cash back on every purchase, they fail to take note of the ongoing annual percentage rate (APR) listed on the terms and conditions page of the credit card offer they are looking at.

Here’s why most of us don’t pay attention to the APR on our credit cards—and why we need to start.

1)    We don’t plan to carry a balance. If you think you’ll pay off your credit card in full each month, then it doesn’t matter if the ongoing APR is high, right? Wrong. Life happens. The best of intentions can go astray, and you can easily find yourself unable to pay off those purchases you thought you could afford earlier in the month. Maybe you planned to use money from you end-of-month paycheck to cover those new kitchen appliances, and then your cat got sick, incurring high veterinarian bills. It’s easy to get in financial trouble that leaves you paying just the minimum amount due on your card each month. If your APR is high, the interest you’ll rack up every month can make it much harder to bring that balance down to zero. But if you have a low APR credit card, getting back on track is much more manageable.

2)    Some people don’t realize the APR for purchases is different from the APR for cash advances or balance transfers. Say you get an offer for a 0% APR balance transfer credit card. You might think that there will be no interest charged on that card for the entire promotional period, and thinking that, you make several large purchases and take cash out of an ATM using your credit card. Guess what? The APR for cash advances is notoriously high, and there is never a 0% APR offer for cash advances. Likewise, a 0% APR balance transfer offer may not also mean there is no interest on purchases for the same introductory period. Always read the full terms and conditions when you get a new credit card, especially one that comes with enticing sign-up offers and promotions.

3)    You don’t know that your credit score affects your APR. When you open a new credit card, the issuing bank looks at your credit report to help them determine your level of creditworthiness. A higher credit score translates to a lower APR. The lower your APR, the more likely you are to be able to keep on top of balances you may carry over month-to-month, also known as revolving balances. When you pay attention to the APR you are given on a new credit card, you’ll see that it often corresponds to your credit score. If you have an excellent credit score but are assigned the highest-level APR advertised for a card, call up and ask for a lower APR.

Now that you know why a low APR matters, start paying attention to that fine print and watch your financial picture brighten.

 

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