A credit card's APR is the abbreviation for annual percentage rate. It is an annual rate that is charged to a credit card customer's account for borrowing money from a card issuer or bank. The APR is calculated as a single percentage amount which reflects the actual yearly cost of funds lent to a consumer via the credit limit on a credit card. It's important for card holders to know that the advertised APR on a card can differ for many types of transactions.
Card Agreements
Credit card agreements detail a cardholder's yearly membership fees (if any), the interest-rate structure, late penalties, transaction fees, and over-limit charges. With each card there may be varied APRs, meaning rates that may be different for cash advances or over-limit fees than for regular purchases. It is important for you to understand the different fees and regulations that determine your financial obligation to a bank as a credit card user.
Banks Must Be Clear
Legally, credit card companies must display upfront to customers the APR when the customer applies for the card. Before you sign any credit card agreement, make sure the APR is clearly stated by the card issuing bank. Read any card agreement fully before applying. As of 2010, the new credit card law put forth by the U.S. government clearly states that banks are no longer permitted to retroactively increase rates or increase rates in the first year you open an account, and they are prohibited from charging misleading late fees or using over-limit fees to add to an existing balance.
Zero Percent APR
Some banks may offer a zero percent APR for the first year to a cardholder and wave any fees to entice the consumer to apply for a credit card. The APR, however, may jump up to a higher level after the first year. The bank should state the new interest rate clearly in the credit card agreement. Knowing the different rates upfront is especially important in balance transfer transactions, which can vary from one card to the next.
A Variable APR
A variable APR rate is calculated by adding a set number or numbers (called the margin), which is determined by the issuer, to a reference rate (called the index), such as the U.S prime market rate. When the prime rate goes up or down, a variable APR is likely to fluctuate, the timing depending on whether the bank updates rates on a monthly or quarterly basis. These types of fluctuations may lead to an APR increase or decrease. If the rate increases, the percentage rate will affect the balance you owe on your credit card if you are making minimum or partial payments rather than paying the balance in full. You will be adding this higher interest rate to the remaining balance . Your payments will be a bit less if the APR decreases from the bank. That new number will be reflected in your billing statement.
A Non-variable APR
A non-variable APR is not determined by a reference rate and changes less frequently than a variable APR. However, a non-variable APR is not guaranteed. Several banks have the right to change a non-variable APR if market conditions change, but they must notify you as the card carrier first, usually with a letter at least 30 days in advance.
Understanding Your Options
By understanding the different options regarding APR rates, the consumer can choose to improve her financial stability. By switching from a high interest rate card over to a credit card with zero APR and paying it off in a year (or the time frame that is included in your offer), the consumer will accrue no interest on the debt while paying it off. This can lead to longer term financial independence for a cardholder. Some banks are still offering a zero APR for the first 12 months on new accounts if the customer is willing to transfer high balances over from an existing credit card.
Highest APR on Cash Advances
The highest APR rate on any credit card is the rate charged for cash advances. For instance, you may have a zero APR offer for balance transfers but for a cash advance, the rate is usually 25 percent or higher. Try not to use a credit card for a cash advance unless you are willing to pay the high percentage APR. For example, on a card with a 25 percent APR interest rate on cash advances, for every $100 you borrow, you are going to pay $25 in interest fees. That can eat up your credit line and your wallet over time.
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