Because of the Truth in Lending Act, the APR figure for a credit card should be prominently displayed on your monthly bill or on any credit card offer. This figure represents the cost of credit calculated over one year.
When shopping for a credit card, use the APR to compare how expensive borrowing money will be on each card. Even though an APR should be obvious on any offer, it’s also well worth reading the small print, as you may find that the card has a set of different APRs for different features. For example, the APR for cash advances may be higher than that for purchases. You may also discover that the low APR prominently displayed on the ad is only an introductory rate, and it will increase after a few months.
Calculating Periodic Interest
Of course, you don’t pay your credit card bill just once a year, and knowing precisely how much interest you’ll be paying on your purchases is actually a relatively complex calculation. To give yourself just a rough indication of how much interest you will be paying each month on a balance, divide the APR figure by 12. For instance, for a card with a 22 percent APR, the monthly periodic rate will be 22 divided by 12, which equals 1.83 percent. However, most cards, will actually recalculate interest on a daily basis, not monthly. So it can be a little more accurate to divide the APR by 365 to discover your daily rate. Even this doesn’t give the full picture however, as interest is compounding each month that you don’t pay off your bill in full.
APR vs. Annual Fee
Besides charging interest, many cards will charge an annual fee. You often will find that a card with a low APR will charge a higher annual fee, and vice versa. Which of these you choose depends on how you intend to use the card. If you’re pretty good about paying off most or all of your monthly balance promptly, it makes sense to opt for a card with a higher APR and lower annual fee, as the interest charges won’t affect you much. If you think you’re liable to carry balances for any period of time, you should shop around for a low APR, even if it means a higher upfront fee.
APR Can Change
Just because you signed up for a card with a fixed APR doesn’t mean it will always stay at that level. Credit card companies have the right to vary your APR, although since the passing of the CARD Act in 2009, they must provide you 45 days’ notice before doing so. It’s worth reading all the correspondence from your company because you might just discover that your interest charges are about to go up significantly.
Minimum Monthly Payments
When you carry a balance on your card, the credit card company will tell you that you have to pay off at least a minimum amount each month. Many people get lured into the trap of making only the minimum payment. In fact, because of how APR works to accumulate and compound interest, if you make only a small extra contribution over this minimum each month, you will get out of debt much faster, and accrue less in finance charges.