What is APR: A Breakdown of Annual Percentage Rates

If you have spent anytime researching credit cards you have come across the acronym A.P.R. but what is it and why should you concern yourself with it? A.P.R. stands for Annual Percentage Rate. APR varies from business to business but it is the rate of interest, on a yearly basis, that is applied to the balance carried on a credit account. The Truth in Lending Act established by the federal government, requires all creditors to disclose the APR on credit and loan agreements. When comparing creditors and programs you should see their terms & agreement for the specifics of their APR stipulations.

When you have been approved for a credit card and begin using it, you will start to receive billing statements. The credit card billing statements you’ll receive in the mail or if you go ‘green’ and you elect for online statements, will outline the finance charge (interest) as a monthly or daily periodic rate. It will also offer the interest as the APR on the balance.

For example, if your APR is 12% you may see a calculation such as:

12% ÷ 12 months = 1.0%

This percentage is you monthly periodic rate and determines the cost of credit for any given month*. To determine the daily periodic rate, you can use 365 in place of the 12 in the calculation above. If you have a balance of $500 dollars, the cost of credit can using the monthly periodic rate, would be expressed as:

$500 (Average Daily Balance) x 1.0% (Monthly Periodic Rate) = $5 (Monthly Charge)

*Some cards use a daily periodic rate to calculate the finance charge.

Balance Computation

As you compare different credit cards and associated offers, it is wise to compare the APR, as it has the greatest impact on the cost of a credit card. Nevertheless, there may be other items to compare when determining the right card for you or your business. Every situation is different, every card is unique, and if you are working to repair your credit you may be considered a high risk borrower and subject to additional charges, restrictions, or promotional specials. In short, the method for determining your balance can make a big difference in how much interest you pay and will vary from creditor to creditor.

For additional information on APR and example cases, visit http://www.careonecredit.com/knowledge/cost-of-credit.aspx or your credit card company. Don’t have a credit card or need to rebuild your credit? Learn more about using credit cards to rebuild your credit.