If you’ve ever shopped for a loan or gotten a credit card, you’ve seen the term APR, or annual percentage rate, all over financial websites and your account statements. But many people aren’t sure exactly what it means or how to get the best APR.
Why is APR important?
Being aware of the APR you're paying on debt is crucial so you can prioritize it in the big picture of your financial life. Getting rid of debt in order of highest to lowest interest rate allows you to eliminate the most significant interest expense in your budget. Then you can use that extra money to continue paying down debt balances as quickly as possible.
Being aware of the APR you're paying on debt is crucial so you can prioritize it in the big picture of your financial life.
Let's take a look at what every borrower should know about APR. We'll talk about how it gets calculated, the different types, it's significance in your financial life, and what's the best APR for you.
What is credit card APR?
A credit account's APR shows how much you have to pay to borrow money. If you have a credit card with a 24% APR, that’s the rate you’re charged over 12 months, which comes out to 2% per month.
Since months vary in length, credit cards break down APR even further into a daily periodic rate (DPR). It’s the APR divided by 365, which would be 0.065% per day for a card with 24% APR. The formula for your credit card bill is the daily rate multiplied by your daily card balance, which is then multiplied by the number of days in the monthly billing cycle.
It’s important to note that you’re only charged APR on credit card charges when you carry a balance from month to month.
It’s important to note that you’re only charged APR on credit card charges when you carry a balance from month to month. If you pay off your balance in full by the statement due date, you only pay what you charged and avoid all interest charges. That's the best way to use credit cards, so I strongly recommend it!
The time between making a credit card charge and your statement due date is called the grace period. You typically have about 20 days in each billing cycle to float new purchases.
For instance, if you order a new pair of boots online on March 1, and your credit card bill isn’t due until March 21, you can delay payment for 20 days. As I mentioned, if you pay off your entire credit card bill, those boots aren’t subject to the APR.
Types of credit card APR
Most credit cards have different types of APR that vary depending on the issuer and how you use the card.
- Introductory APR or promotional APR is a lower rate...
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