Do you know the answer to the question, “What is APR”? APR, which means Annual Percentage Rate is defined to be the yearly interest generated by a sum that is charged to borrowers or paid to investors.
It is the official rate that is used to help people understand the cost of borrowing. APR takes into account the interest rate plus other additional charges of a credit offer. Lenders are required to tell you what their APR is before you sign a credit agreement with them.
What is APR?
It is expressed as a percentage that signifies the yearly cost of funds over the term of a loan or income earned over an investment. This includes fees or additional costs that are associated with the transaction but doesn’t take compounding into account. APR provides people with a bottom-line number that they can compare among lenders, credit cards, or investment products, to know which to go for.
What Is APR on a Credit Card?
Based on credit cards, there are a few points that are helpful if remembered. Annual percentage rate (APR) is one of the most common and important keys will encounter as it determines the cost of borrowing on your credit card.
Calculate Credit Card Interest Using APR
Interest charges are applied to a persons’ monthly statement. As some months have longer days, many credit card issuers use a Daily Periodic Rate (DPR) to get the amount of interest you will pay. This DPR is calculated by dividing the APR by 365 or 360, depending on the card issuer.
The DPR which is expressed as a percentage is then multiplied by the number of days in the cardholders billing cycle. That amount is multiplied by card user’s average daily balance. And the final total is the interest charges for the month of card use.
Below is an Example:
If a card user is carrying a $5,000 average daily balance at 15.99%. Then the Daily Period Rate is 0.0438% (which is 15.99% divided by 365). There are 30 days in the billing cycle. Using the formula, the DPR (0.0438) is multiplied by the number of days in the billing cycle (30), then multiplied by the average daily balance ($5,000). The calculation will look like this: (0.0438%) x (30) x ($5,000) = $65.70 of interest charges for the month.
Types of APR
The different types of APRs include:
Purchase
This is the rate applied to purchases on a credit card.
Cash advance
Rate for borrowing cash on a credit card. It is higher than that of purchases. There might be a different APR for check or some type of cash advances, and there is no grace period.
Penalty
This is the highest APR. It can be applied to certain balances when you violate the credit card terms and conditions by failing to make payments when due.
Introductory or promotional
This is a very low rate offered for a limited time. It applies to specific transactions, and balance transfers, cash advances or any other combination.
How to Get a Lower APR on Credit Card
- Use your credit card responsibly and get the bills paid on time
- Avoid exceeding the credit card limit
- Keep on building
- Apply for only the credit card you need
- Monitor your credit
APR vs. APY
APY refers to Annual Percentage Yield. It is sometimes referred to as Effective Annual Rate (EAR). APR calculates the amount of interest that you will be charged when you take loan.
While APY/EAR is the calculation of interest made when saving. It typically applies to money placed in a deposit account, and not to money you borrow.
