The ABC’s of APR’s
Thursday, February 12th, 2009We are all familiar with the different terminology and the abbreviations associated with credit cards but do we really know
what they mean? In many cases, this is one of the reasons people fall into credit card debt and other financial problems. They take on accounts with terms and conditions they not only do not understand but in some cases, didn’t even read.When you want to apply for a credit card, one of the most important factors to consider is the APR. So let’s take a look at exactly what the APR of a credit card means to you.
What is an APR?
APR stands for “annual percentage rate”. It is the interest rate you are paying on any balance you carry over on your credit card. Different credit cards will offer different APR’s and different types of APR’s.
Types of APR
Fixed APR – When you apply for a credit card with a fixed APR, it means that the interest rate will remain fairly consistent during the life if the account as long as you are paying your bills on time and not exceeding your credit limits. However, even with a fixed rate, you must read the samll print and make sure that there are no additional clauses noted that allow the credit card company the abililty to change the rate at their own discretion.
Variable APR – If your credit card interest rate is dependent on another interest rate, such as the Prime Rate or the Treasury Bill Rate, that means that as those rates change, so too will your credit card rate. A variable APR can either increase or decrease so unlike a fixed rate, you might not always know what your rate for the month will be.
Introductory APR – In order to stay competitive, many credit card companies will offer enticing introductory rates to encourage people to sign up for a new account. These promotions often include a promotional or introductory APR which is lower that the standard rates. Introductory APR’s usually only last for a limited time and is only offered on new cards.
Multiple APR – Some credit cards will have different rates for different credit card transactions. There will be one APR for all general purchases made on the card. There will be a different APR calculated for all balance transfers and maybe even another separate APR calculation for all cash advances taken on the card.
Tiered APR – When customers maintain a balance on their credit card month after month, some credit card companies will charge a different APR for the different levels of that balance. Typically, the APR will be higher for lower outstanding amounts but lower for higher amounts. Some cards will use that same calculation in reverse.
Penalty APR – when you are late making your monthly payment, your credit card account may be subjected to an increase in your APR.
Having a solid understanding of what kinds of interest rates there are associated with credit cards can help you make more reliable decisions about what credit card is right for you. If the interest rate is too high for you to be able to afford, you need to find one that meets your needs.
