So you received a credit card offer in the mail? You quickly see “APR xx.x%“. Do you know what it means?
APR stands for Annual Percentage Rate… but I know you didn’t read this blog post just to hear that!
What APR is Not:
The biggest misconception about your credit card APR is that it’s simply the interest rate you pay on your credit card charges. For example, you charged $100 yesterday to your credit card with a 19% APR. That does not mean your next bill will be $119 – It’s a little more complex then that.
Alright now we know what an APR is not, so let’s take a look at what it means for your bill.
We’ll begin with how an APR is calculated –
- Many credit cards have an interest rate that varies. This variable rate changes based on what we call a reference rate. The formula for a variable APR is (margin) + (reference rate).
- The margin is a set number that doesn’t change and decided by the credit card company. The set number is always added to the reference rate.
- A common reference rate for a variable APR is the US Prime Lending Rate, or Prime Rate. The Prime Rate is the rate charged to a bank’s best customers- those with the highest credit ratings.
Assume that your reference rate is the US Prime rate, which is 3.25%. Your margin is 15.75%. Your variable APR is (3.25% + 15.75% = 19%).
How Your Bill Looks:
Now in order to know your total interest for this months bill, you need to divide your APR by 12%. (the length of months vary so many credit card companies use daily interest rate or DPR). For argument sake, we will use the monthly method.
Your monthly interest rate is 1.5% (19% / 12% = 1.5%)
Let’s assume the remaining balance on your credit card is $1,200 with an APR of 19%. Your bill will be $1,218. This is a very simplistic explanation of APR. It gets more complex after considering compounding interest (later time).
What’s a Bad APR?
There are cards that carry APR’s well above the 19% mark. First Premier Bank, for instance, has a product that currently carries a 36% APR. At one point this card featured a 79.9% APR <<—thanks, but no thanks.
Once you get above 22.99%, you’re better off getting a secured card if you plan to carry a balance.
The idea is to use this card to build your credit. A low APR is considered below 10%. To get low APR’s you’ll likely need a credit score above 700. If you have a less than stellar credit score, the best place to look for the lowest APR’s is your local credit union.
Credit Wise Tip:
Always remember to pay off your current credit card balance in full before applying for a credit card with a lower APR or high credit limit.