One of the most important factors when deciding which credit card to choose is a comparison of the APR, or Annual Percentage Rate. This is the cost of credit, the actual interest rate, determined on an annual basis and expressed as a yearly rate. By comparing the APR of credit cards, you can determine which card will cost you most, barring fees such as late payment charges, ATM fees, or cash advance charges. The APR offers a standardized way to compare yearly interest rates, whether the interest is computed on a daily, monthly, or yearly basis.
Under the federal Truth in Lending Act, credit card companies must provide you with information about the APR. If you understand the APR, you have a better chance of making your money work for you. When it comes to calculating the APR, you will have to do a little math, but it is well worth the effort to know exactly where you stand, financially speaking.
If you look at your credit card statement, you'll find that the finance charge, interest, is expressed both as a periodic rate and an annual percentage rate. If you divide the annual percentage rate by 12, you will come up with the monthly periodic rate. It is important to recognize that when you sign up for a credit card, you are signing a contract. If you understand how the interest on your account is calculated, you are much more likely to use your credit card wisely.
There are other things you need to know about the APR. Your card may, in fact, carry different APRs for various transactions. For instance, regular purchases might be subject to an APR of 16 percent, while cash advances carry an APR of 19 percent. Also, if your card has a variable rate, it can be altered throughout the year. You should consider reading your credit card agreement and talking to a customer service representative to find out more information about your card's APR.
You should also consider selecting a card with an APR that is appropriate to your needs.
For example, if you are able to pay your balance in full at the end of the month, select a card with a low annual fee. In such a situation, you can afford a card with a higher APR, since you will not be carrying a balance. However, if you will not be able to pay off your balance at the end of the month, select a card with a lower APR.
You can also use the APR to your own personal advantage. If you carry a balance on your credit card, pay more each month. That way, even if you face a high APR, you can minimize the interest you pay on the card. It's important to recognize that, if you only pay the minimum balance each month, you will have to pay more interest. It will also take you longer to pay off your debt.