Credit Cards
Understanding APR
Consolidated Credit Counseling Services is determined to help educate you on the
nuances of credit card spending. With that goal in mind, we have created this guide on understanding your Annual Percentage Rate. The more perceptive you are in regards
to your personal finances, the better chance you have of staying debt free.
The Annual Percentage Rate is the cost of credit – interest rate
– calculated on a yearly basis and is conveyed as a yearly rate. By comparing the
APR of competing credit cards you can determine which card is appropriate for your
financial circumstances. Why choose a card that will cost you more money? Shop around
and be an educated consumer. You will only benefit from understanding as much about
credit cards as possible – you should make the choices, it is your money and you
are making a pledge (it is an official contract) to the credit card company to pay
your bills on time when you sign up with them.
How To Calculate Your APR
The finance charge or interest on your credit card
billing statement is conveyed two ways – as a periodic rate (monthly or daily) and
as the annual percentage rate. To calculate your monthly rate you simply divide
your annual percentage rate by 12. For example:
18% divided by 12 equals 1.5%.
To calculate the monthly finance charge using a monthly periodic rate, multiply
the Average Daily Balance x Monthly Periodic Rate = Monthly Finance Charge.
For example, if $200 is your account balance then: $200 x 1.5% = $3.00.
Some cards have a daily periodic rate. To get the daily periodic rate, you divide
the APR by the number of days in the year (365).
For example, 18% divided by 365 days in the year equals .05%.
Interesting Facts About APR
Be certain to read over your credit card’s disclosure statement. If your credit
card has a variable rate, it could change and cost you more money during the year.
Also, if possible, try to get a credit card that has one APR for every feature.
Some cards have varying APR’s for each feature, such as 17% for regular purchases
but 19% for cash advances. Again, study your contract with the Credit Card Company
or bank – be financially aware.
Educate yourself; you should know your financial situation better than anyone else.
If you have to carry a balance every month then look for a card with a low APR,
but be careful about the yearly fees on cards with lower APRs. If you can cover the full amount of your balance every month then select a card with low annual fees
and don’t be as concerned about the APR. Call the credit card company; ask questions,
some companies will negotiate with you regarding lowering your APR or annual fees.
Make The APR Benefit You
In every facet of life, there are little tricks you can learn that will benefit
you and your family. That’s true in the credit card industry, too. If you cannot
find a card that suits your needs AND has a low APR you can still reduce the interest
you pay on the card – just pay more than the minimal monthly payment each month.
The longer it takes for you to lower your debt, the more interest you will be paying.
Just think, as each month passes the balance that you carry incurs more and more
interest.
Study this example:
|
A card with 18% APR |
Minimum
Monthly Payment |
Higher
Payment |
|
Monthly
payment amount |
$30.00 |
$100.00 |
|
Number
of months to re-pay |
47 |
11 |
|
Total
Finance Charge |
$369.67 |
$91.57 |
If you simply make the minimum monthly payment it will not only take you 47 months
(that’s almost four years!) to pay off the debt, you will also be up to your ears
in finance charges. Now, if you make the financial effort to make a larger payment
each month you will dramatically reduce the time it takes to pay off the debt (11
months) but you will also reduce the finance charges by $278.10.
If you cannot make higher payments then it is in your best interest to find a card
that has the lowest possible APR. But please take heed to this warning – credit
card balances multiply extremely fast when only the minimum payment is made. You
will be shocked to find how rapidly your debt increases. This is how so many individuals
and families spiral into a financial crisis. They make the minimum payments and
don’t curb how much they charge. And to make matters worse, they don’t pay attention
to their credit card bill when it arrives each month. Suddenly, even though they
got a card with a decent APR, their balance is out of control.
Credit card companies will not warn you of these pitfalls when they issue you a
card. They are out to make money, so it is up to you to be educated and financially
responsible.
