Money Girl explains credit card APR and how it gets calculated on your account.
Q. "I’m trying to understand the differences between my various credit cards. What exactly is a credit card APR and how is it calculated?"
A. APR is short for Annual Percentage Rate, which is the interest you’re charged over a 12-month period.
For instance, a card with 24% APR costs 2% per month on balances that you carry from month to month.
But what’s tricky about credit cards is that a single account can have several different APRs. The card company may charge one rate for purchases, one for balance transfers, and another for cash advances. Additionally, some APRs are variable and can change over time.
How Credit Card APR is Calculated
Interest for credit card balances is calculated on a monthly basis. But since months vary in length, most card issuers use a daily periodic rate (DPR), which is the APR divided by 365.
The daily rate is multiplied by your daily account balance and by the number of days in the month. Here’s the basic formula:
Balance x DPR x days in monthly billing cycle = interest for that month’s credit card statement
How Credit Card Payments Get Applied to Your Account
As I previously mentioned, different types of credit card transactions may come with different APRs. When you make a payment it generally gets applied toward your balances in order of highest to lowest rate. That helps you get rid of the most expensive debt first.
It’s important to always make credit card payments on time because being late can cause you to be subject to a higher penalty APR.
Some cards offer an introductory APR which is a temporary low rate on new accounts. After the promotional period ends, the APR may adjust to a higher rate. A credit card’s complete APR information must be clearly displayed in your card agreement and on the issuer’s website.
Understanding APRs can help you use credit cards wisely and save money on fees and charges. Remember that you’re never charged any amount of interest if you pay a credit card balance off in full by the statement due date.
Other Links You Might Like:
Credit Score Survival Kit – a free multimedia video tutorial with 3 strategies to raise your credit scores!
APR on a Toy Block image from Shutterstock