You may have already heard the term APR (annual percentage rate) used when talking about mortgages, loans and credit cards. APR is used to assess the real expense of borrowing money. It represents the interest rate provided on your loan, your points, mortgage fees and other expenses when availing loans. You may have also noticed that APRs are often higher than interest rates because it contains all the costs of the loan.
How Does it Work?
In general, lending companies provide a grace period for new investments. If you avail loan acquisitions and pay the total ending balance every month on time, you are only paying the exact amount of debt with no interest. But if you choose to leave a certain balance on your credit card, you will be required to pay for the interest of your outstanding balance as agreed upon with your lender.
Lending companies and banks use specific formulas to calculate the APR you have to pay based on your current outstanding balance. Depending on the credit card you use, they determine it by using a daily or monthly periodic rate. Remember that some accounts utilize multiple APRs, so calculations can be applied for each APR. Your statement provides you more info about how they determine the balance subject in your interest rate.
Types of APR
There are various types of APR, depending on how you use your credit card. When choosing a certain credit card, it is an excellent idea to check for their rates in contrast to your credit needs.
- Purchase APR – Rates commonly applied when purchasing with your credit card
- Cash Advance APR – The expense of borrowing funds from your card are usually higher. There are various APR when using checks and other kinds of cash advances. This type of APR does not have grace periods.
- Penalty APR – The highest among the other APRs. It can also be applied to other specific balances every time you breach the terms and agreements, such as not paying on time.
- Promotional APR – Also called introductory APR. Provides you with a low APR rate for a limited period of time. This usually applies to certain transactions, transfer of balances and other combinations.
How To Evaluate APRs
For credit card accounts, the average APR owed during 2017 was at 14%. However, not all credit cards are equal. Some are even more expensive if outstanding balances are accrued compared to others. For a rewards credit card that offers benefits, these usually have a higher APR compared to a balance transfer credit card. Be aware of your financial needs before you choose what kind of card will suit you best and allow you to save money fast.
Various transactions, including transfer of balances, cash advancements, and transactions can have different APRs on a same card. There are also charges on your APR if you are late on your payments. These rates are all written on your credit card’s terms and agreement, so it is important to read and understand each of them. If you want to get a low APR on your purchases, you can try researching choices from other credit institutions instead of banks.
What To Do To Get the Best APR?
The dilemma with APRs is that you will never know your rate until it is offered to you when you apply for a card or a loan. Each time you apply, a check is made on your credit history, which can lead to a lower credit score. This means it is bad for you to apply for multiple cards and loans at the same time.
The best thing to do is to check your credit history and be aware of your current situation. The best APR will depend on how you fulfill specific conditions and while maintaining a higher credit score. Always check your credit reports to be knowledgeable of your financial situation. Having a good credit history means you will be offered a better APR.