In addition to explaining what an APR is, we will explain how it is calculated and how it can impact your choice when choosing a deposit. Besides deposits, APR is also present in other products, such as personal loans and mortgages, but it has different meanings in each case. Let’s take a closer look at the APR and how we can use it when comparing deposits.
As well as credit cards, this concept also applies to secured or unsecured lines of credit, mortgages, personal loans, and any other type of financial credit.
Note: Your credit report is largely responsible for determining the APR you will be charged on your loans, credit cards, and lines of credit. Interest rates are set by banks, credit unions, and financial institutions according to your credit score. Consequently, consumers with good credit are perceived as more creditworthy and are therefore considered less risky by banks.
What is the APR for a credit card?
APR stands for Annual Percentage Rate. There are a variety of costs associated with loans, whether they are credit cards, lines of credit, or mortgages. In America and around the world, even car loans are subject to APR rates, but how does this percentage work? Would it be the same as the interest rate?
Not really. The APR includes not only the amount that a financial client -whether an individual or a corporation – must pay in interest, but also fees, collection expenses, credit rates, and other fees associated with the credit. As opposed to the rate, which is only based on interest paid, the APR includes all expenses.
Let’s look at an example. You may be tempted to go with bank B if bank A offers you $5,000 at an interest rate of 10%, but bank B offers $5,000 at 8%. This allows you to access the same amount of money at a lower interest rate.
However, it is not always the case. To find out which bank offers you the best deal, compare APRs, not interest rates. For example, Bank A may offer a lower APR than Bank B. You might miss out on a golden opportunity if you base your decisions only on interest.
What is the difference between Interest and APR on a credit card?
Even though APRs and interest rates aren’t the same for most credit instruments, they are for credit cards. Still confused? Not anymore! As for credit cards, there are different charges, including annual fees, maintenance payments, and balance transfer charges, and they are all detailed in a separate document.
Under the federal Truth in Lending Act, which governs all consumer loan agreements, lenders must list their interest rates as the annual percentage rate, the “real” cost of the loan, which includes interest as well as commissions and other costs.
As an example, when you get a mortgage, you often have to pay an origination fee, points, and other costs up front. An APR is calculated taking all of these into account, so a mortgage at 6% might cost you 6.15% per year.
APRs are only calculated for credit cards because the issuer doesn’t include balance transfer fees, cash advances, late fees, etc., in the APR. This is due to the fact that it is impossible to predict which cardholders will be charged which fees. However APR and interest rate are the same when it comes to purchases.
What is the purpose of not including commissions, transfer fees, and the like in the credit card APR? Due to the fact that not all users with credit cards will incur the commissions.
Keep Reading: How do I increase my credit score with Capital One?
What is the difference between fixed and variable interest rates?
When you start your search for a new credit card, you may notice different interest rates, which are referred to in the financial and banking industry as fixed interest rates or APRs and variable interest rates or APRs. How do they differ?
- An annual interest rate that fluctuates can be referred to as a variable APR. Variable APRs increase or decrease in relation to an interest index, such as the prime rate published in the Wall Street Journal. Credit card variable interest rates may change when the prevailing prime rate changes.
- A fixed APR, on the other hand, is an interest rate that remains the same over time. Thus, the rate is not subject to a specific rate. Does that mean it won’t change in the future? Not necessarily. Banks have the right to adjust interest rates, but must notify you before doing so.
What are the different types of APRs you may find on your credit card?
Credit cards may have different APRs. The following terms should be familiar to you so that you know the amounts and charges that your bank may charge you for each transaction:
- An APR for purchases when you make payments with your credit cards, such as grocery shopping, online purchases, or the purchase of basic products and services. If you do not pay off your balance by the cut-off date each month, the APR for purchases will apply. Grace periods and 0% interest rates are offered by some credit cards at the beginning of the contract.
- A balance transfer APR is the interest rate your financial institution will charge you for moving debt from one credit card to another. You can also use some cards that offer 0% introductory APRs for balance transfers if you want to consolidate your credit card debt. Grace periods for balance transfers are limited. The bank will begin charging interest on remaining balances once the 0% offer ends.
- The introductory APR is a rate that credit card companies and banks offer consumers when they sign up for a particular credit card. This is a deal that promises 0% interest on purchases, balance transfers, or all of the above. If the 0% introductory APR sounds appealing, make sure you understand the terms, such as when interest begins and what APR will apply after the introductory period ends.
- The Penalty APR is the interest rate the consumer pays when they exceed their credit limit – are overdrawn – or make a late payment. Payments more than 60 days late will also be charged this APR, which is higher than the APR for purchases. After the late payment, if you commit to making minimum payments for six consecutive months, you will be credited with the original rate. If you fail to make minimum payments, you will be charged the penalty rate.
Keep Reading: How to know the balance on my credit card?
How is APR calculated on credit cards?
Different factors are taken into account when calculating the APR of your credit card. When an issuer approves your request, they offer you terms and conditions based on your financial solvency, which will directly affect your purchase APR. The APR the bank offers to you can also be influenced by your credit score. The higher your credit score, the more likely you are to qualify for a lower interest rate.
Remember: Your credit card APR does not include any additional fees. In order to determine if the card is appropriate for you, we recommend that you read your contract carefully.
When you travel frequently, you might opt for a credit card that does not charge commissions when you withdraw money from an ATM abroad, or that is based on the rate of currency conversions of MasterCard or Visa, which is usually higher than what is offered by banks and other financial institutions. There are some credit cards that do not charge fees for balance transfers or annual maintenance.
Based on your lifestyle and interests, you will decide on the best credit card for you. Before accepting a credit card, read the fine print carefully.
How are interest rates calculated?
Credit card interest rates are based on prime rates, which are the interest rates that banks charge their most creditworthy customers, and which are usually 3 percentage points higher than the Fed funds rate, set by the Federal Reserve.
An issuer generally charges an interest rate equal to the prime rate plus a variable percentage rate. For example, if your APR is 15.5% and the prime rate is 4%, the issuer has added 11.5 percentage points of interest. This calculation appears under the Schumer box on your term sheet.
Depending on your creditworthiness, many cards charge different interests rates. Schumer boxes may indicate that an interest rate ranges from 11.5% to 22.5%. If you have excellent credit, you will pay 11.5%, but if you have poor credit, you will be charged a rate of 22.5%.
The maximum interest rate on credit cards
The ECB specifies the legal maximum for all mortgage commissions and interest rates, but the entity does not specify anything about maximum credit card interest rates. Take a look at the official page where they clarify the current law affecting these consumer financial products.
Banking institutions must clearly state what the fixed interest rate is that will be charged to the person who uses his credit card. Therefore, as a consumer you must always be aware of the cost associated with financing your purchases with plastic. A written notice must be sent to you at least two months before the change is made if the bank decides to change it.
If you decide to cancel it after receiving the product, you can do so. If you don’t, the new conditions will be assumed.
Is there a maximum credit card interest rate?
If there is no regulation indicating the maximum interest rate on credit cards, the answer would be yes. Consumers today have access to online resources that allow them to compare options instantly. The current level of competition between banks and other companies in the sector also makes it impossible for rates to be set outside the limits set by the market. Even without specific regulation, credit cards usually have similar APRs. The differences between them are in the added services they offer, the commissions they give, or the ability to control and manage through online banking.
A comparison of maximum credit card interest rates
Although there is currently no regulation that limits the maximum credit card interest rate, users can compare the offers to find one that is more affordable. Due to this reason, it is convenient for you to review the APR of the cards rather than focusing on the nominal interest rate.
The annual percentage rate summarizes the total interest and commissions associated with using a particular credit card. The TIN is the nominal interest rate, which can be expressed either annually or monthly. Therefore, a card with a low TIN may have a high APR, making it more expensive for you. As a result, it will not be the best choice.
Keep Reading: Top 3 credit bureaus and how they are used?
How to get a good credit card APR?
You will have more opportunities to obtain attractive and favourable APRs if you work hard to improve – or maintain – your credit rating. A good credit score is essential to qualify for the lowest annual interest rates in the market, something that will save you money in the medium and long term.
Consider applying for a balance transfer card if you need a lower interest rate. You can use this type of instrument to consolidate your credit card debt into one that, in addition to being easier to pay, has a lower APR than most purchase credit cards.
Remember to check how much each balance transfer will cost you.
Summarize – APRs for credit cards
If you know what the APR is and the different types of APRs that can be applied to you- for purchases, transfers, penalties, or introductory APRs- you will be able to request the credit card that best meets your needs. Additionally, you can use the APR of a credit card to compare it to others and determine which card is more beneficial from a financial standpoint.
When comparing the APRs of credit cards from different banks in the country, you should take into account whether it is a fixed or variable rate, as they both have their advantages and disadvantages.