Credit Card Debt Essentials

Understanding Annual Percentage Rates (APR)

Being able to understand how interest rates and APR (annual percentage rates) work is vital to managing debt and controlling your personal finances. It’s also a critical element in determining how to reduce your debt, because it allows you to assess your debts strategically as you decide what to pay and how to pay it down. Although credit card contracts and loan applications can be intimidating, reading your applications for lines of credit carefully can be the difference between getting the right deal and putting your finances at risk.

If you’re having trouble with debt, because your interest rates are too high it may be time to consider strategies to reduce your debt. If high APR is causing financial stress in your life, call us at 1-888-881-3619 to assess your debt and determine the best way to pay off your debts. You can also have your debt evaluated by a certified credit counselor using our Free Debt Analysis.

Interest Rates vs. APR

One area that can cause consumers confusion is the difference between an interest rate and APR. Particularly when it comes to your mortgage, these two numbers are actually different. They can also be different when you apply for lines of credit. The interest rate usually refers to your monthly rate of interest—it’s the number your creditor or lender uses to calculate your monthly payments.

Annual percentage rates include the monthly interest rate, but also add in up-front costs and any annual fees associated with the account. In a practical sense, the APR is the true cost of that loan or credit line. Two credit cards with the same monthly interest rate may have very different APRs and the credit card with the higher APR will end up costing you more per year.

Calculating Interest Using APR

Your credit card statement each month should provide two rates of interest—your monthly interest rate (sometimes called the periodic interest rate) and the APR. In some cases the periodic rate can also be a daily interest rate, which means interest builds each day rather than each month.

If your statement only lists APR, you can simply divide the number by 12 to get your monthly interest rate.

• For example, if your APR is 18% then the monthly interest rate is 1.5%.

Once you have the monthly interest rate, you can use it to determine when and how to pay down your debts. You can easily calculate your monthly finance charges by multiplying your monthly interest rate by your total account balance.

• Let’s say you have a zero balance on your 18% APR credit card with a 1.5% monthly interest rate. You buy an item for $1000 and don’t pay off the balance immediately. At the end of the month, your monthly finance charge will be $15.

In some cases the minimum payment on your credit cards is calculated by adding the interest plus 1% of the balance. In others, they simply ask you to pay a certain percentage of your total balance—usually between 2% and 5%.

• If you pay interest+1%, your first minimum payment on your $1000 credit card balance will be $25.

Notice that two thirds of your first payment is covering the interest accrued in that month. You only paid $10 towards the principal—the original amount of your debt. This is why it takes so long to pay off your credit cards if you pay only the minimum payments, because most of what you pay each month is being used to cover your monthly finance charges.

Using APR and Interest Rates to Your Advantage

Without a doubt, a low APR credit card is a better than a high APR credit card. Unfortunately, credit card offers and applications are almost never that simple. In many cases, credit cards can have different APR values listed for different kinds of transactions. If you make a regular purchase you have one APR, but the APR on the same card may be different if you do a balance transfer or cash advance. In addition, if you’re late or miss a payment you may face penalty APR charges, which can be much higher.

This is why it’s vital to read any credit application carefully to get a complete picture of what you’ll end up paying with that credit card. This can not only help you determine the best credit cards to get, but also help you build strategies to pay down your credit card debt in the fastest and easiest way possible. As you assess your various debts, always look to paying off the credit cards with the highest APR first.

If you need help assessing your debts and finding a way out of debt, give us a call at 1-888-881-3619 and one of our credit counselors can work with you to analyze your debt and help you identify the best strategy to pay your debts off.