Owning a credit card is a step towards the financial freedom that we all desire. People go through a lot of information about the pros and cons of having credit, which is quite necessary because you need to know what card will be the best for you. But when it comes to the fee, people usually take interest in the joining fee, the annual or monthly interest rate, and sometimes the cash advance fee. This is fine; all these fees are very important to know, but many people lack the patience to read the whole fee structure and every other fee charged.
One thing that is often misinterpreted is APR or interest rates. Although these two terms have similar concepts, they are subtly different. While you evaluate the cost of a loan or line of credit, it is crucial to know the difference between the interest rate and the annual percentage rate, which includes every additional cost or fee.
In this article, we are going to focus on the Annual Percentage rates of your credit card and their significance for how the credit card debt is being paid.
Annual Percentage Rate (APR)
When we talk about APR, we are not just talking about any interest rate levied on a particular amount; we are also including any additional fee involved in procuring the loan. The fee also includes the closing costs, rebates, discount points, and even the broker fee, and these are also denoted as a percentage. The APR is always, or should always be, greater than or equal to the interest rate. There can be exceptions in the case of specialized deals where the lender offers a discount, return, or rebate on a portion of the interest. The annual percentage rate is the interest rate paid each year on your credit cards or any other type of credit.
APR is used to compare the costs of borrowing money from different lenders, and if all factors are equivalent, a loan or a credit card is going to be the least expensive. But there is a critical factor, which is the “grace period,” that needs to be considered and is associated with your credit card or borrowed money.
Grace Period: The Grace Period is when the lender does not charge you any interest on the outstanding amount for a particular period of time. This is different from card to card, along with the issuer. The best part of the grace period is that it will save you from paying extra money over the outstanding amount.
However tiresome these credit card rates may sound, you should know that even privileges come at a price. With its enormous benefits in different categories, credit also has its own fees.
The formula for APR Calculation is:
Credit Card Interest = [Daily Rate] x [Total Daily Balance] x [Number Of Days In Billing Cycle]
Normally, users who are able to pay off their bills on time are not affected by APR. APR is determined based on the outstanding balance, so as long as the bill is paid in full regularly by the due date, APR does not apply.
What is a good APR?
A lower APR means you will have to pay low interest and other charges on your borrowed amount. With many credit cards, you can get offers where the APR is 0% for several months for any type of transaction, be it purchases or balance transfers. But it is still important to know your APR, as you will have to pay it with your balance once the 0% period or Grace period is over.
The APR for credit cards can be quite high, ranging from 40% to 53% at most. But there are other credit cards where you can get as low as 30% APRs. Therefore, it is best to check all the available options and make a decision only after you have found the right credit cards that match your standards.
Often, while looking for a credit card, people make mistakes that make it hard for them later on. When you look for a credit card, many factors are left unresolved, which can cause a hindrance when you have to pay off the debt at the end. APR, or Annual Percentage rate, is one of them. The annual percentage rate is slightly different from interest rates as it includes all fees and charges and not just the interest rate.
There are many different APRs that need to be checked before applying for a credit card. The grace period is one of the important parts that need to be looked at, as it will give you some time off from the APR. APR might sound intimidating right now, and it might also seem like all these rates are not really good, but all the benefits and safety net that a credit card provides for you will be worth it.