Photo courtesy of sovietmole via Flickr, modified by Curiousmatic.
That shiny piece of plastic comes with interest. Figure out your APR, and be in charge of your spending and fees.
Credit cards can be wonderful, but they can also put you in a dangerous place if you don’t pay attention. Most of us have them, and for practical reasons. They help us build credit, so that we can sign that lease for our dream home, and they give us a reasonable way to pay for expensive things over time. If you plan on spending borrowed money, however, it is vital that you know all about interest, APR, and what it means for your personal finances and debt control.
First things first: What is interest? Why should I be interested?
Personal finance may not be exciting, but it is incredibly important.
Credit card interest is a fee you are charged by credit card companies for spending borrowed money. Interest–usually expressed as an annual percentage rate (APR)–allows credit card issuers to generate revenue, and allows you to spend money that would otherwise take a while to accumulate, according to the Federal Reserve.
The Federal Reserve also states that on most cards, you will not have to pay interest on purchases if you pay your balance in full every month. If you don’t pay off your balance, however, you will be charged interest on the unpaid balance, which carries over to your APR.
Okay, so what is my APR?
According to the Consolidated Credit Counseling Service, annual percentage rates (APR) include the monthly interest rate, but also add in up-front costs and any annual fees associated with your account. Basically, your unpaid month-to-month balances are included, and are subject to whatever your APR is.
Well, how is your APR determined? Better Business Beaureau (BBB) explains that your bank evaluates your credit-worthiness to determine if you are a low risk candidate (likely to repay) or a high risk candidate (unlikely to repay), and will offer you an APR based on your credit report and how it profiles you financially.
What are the different types of APR?
There are two types of APR: fixed, and variable.
The average fixed APR cost in America is 13.02%, while variable is 15.25%, according to BankRate.com
Fixed APR is an annual rate that doesn’t change as long as your account is open, and there is no time period stated in your CC agreement.
Variable APR’s, on the other hand, depend on an index outside your credit card company’s control, such as on prime rate or Treasury bill rate.
Make sure to read your credit card agreement carefully; it will explain if and when your rate could change. BBB also notes that issuers can generally only increase your APR on existing balances if your payment is more than 60 days late; however, your original rate must be restored if you make the next six consecutive payments on time.
What can I do to make sure my APR stays low?
Determine the best credit card for you, and keep track of your APR like your life depends on it.
Lower APR is always better, but issuers are often more complicated than that, as they sometimes have different APR values offered for different types of transactions, according to ConsolidatedCredit.org. When choosing a credit card, read all applications carefully so that you get the whole picture.
Lastly, when paying, make the highest payments you can against your balance each month. BBB suggests this as a means to carry the lowest interest rate with you from month to month, lessening the fee on whole. They also recommend trying to keep your purchases less than 25% of your credit limit.
Have tips on APR, or stories to share? Tweet us @curiousmatic, #curiouscredit. We’d love to know your thoughts!