That a labyrinthian journey it is around credit cards; and even more overwhelming, it gets when it comes to comprehension of what APR really is. Though at times very puzzling for any person receiving a credit card, APR becomes one of the most useful terms for any person when he has to deal with his or her debts accumulated from credit cards effectively.
In this post, we explain what APR is, how that affects your finances, and-more importantly-how you can avoid paying it.
What Is Credit Card APR?
APR stands for Annual Percentage Rate. It is the annualized interest rate charged on whatever balance you will carry forward in your credit card. In other words, APR does not mean a simple interest rate that may affect only the principal amount but it covers also the interest and other additional fees associated with your account.
APR is a percent that can vary depending on several factors, including your credit rating, the type of credit card you have, and even the conditions of the lender in general. As such, for instance, if you happen to have 18% as your APR for your credit card, it only means that more than likely, you will be charged 18% on whatever the outstanding balance is at any given time when you cannot pay the amount in full by the due date.
Types of APR
There can be several APRs that may be charged on the credit card. Listed below are some, amongst others.
Purchase APR: The interest rate charged on the purchases one makes by his credit card.
Balance Transfer APR: The rate charged on any balance transferred from any other credit card
Cash Advance APR: This is an interest charged on the cash advance drawn using the credit card facility. It generally goes a notch higher than the purchase APR.
Penalty APR: This is an interest rate higher than Purchase APR or Introductory APR, imposed when one fails to make payment on time or violated other conditions during the use of his/her credit card.
Introductory APR: A temporary interest rate lower than Purchase APR. It is available for a certain period starting from the date you opened your credit card account.
Any one or all of these APRs can affect your financials differently, since you tend to use your card in different ways. Understanding the terms of each one of them will take you a long way in keeping unnecessary interest charges at bay.
How APR Is Calculated
The best way to understand how APR works against you is to understand how it’s pre-calculated. Most credit card companies take the annual percentage rate and divide it into 365 days in order to get the daily periodic rate charging this rate against a person’s current daily balance.
For instance, if your card is 18% APR, the daily rate would be 0.0493% 18÷365 and that applies to that average daily balance. The longer you carry a balance, the more interest will accrue.
These daily compounding’s can add up a whole lot faster than most people may think. All it takes is for a minor balance to be carried over, month-to-month, and the effects of interest charges take leaps in bigger jumps using dollars that could be put to much better use directly on reducing your debt.
How to Avoid Paying APR
With just a little discipline in one’s financial habits, one can avoid paying APR. Here is how you can do this:
Pay Your Balance in Full Each Month
Paying off your entire credit card balance every month is how you most forthrightly avoid APR altogether. If you do that, the interest-free grace period-the time between the end of the billing cycle and the due date-is yours for the asking.
No interest is charged, provided you pay the full balance within that period. But, if you carry so much as a fraction of your balance into the next month, you are charged interest on your total balance and not just the new purchases.
Use 0% Introductory APR Offers Wisely
Most of the credit cards have 0% intro APR for a set period of time, usually ranging from six to eighteen months. You will not pay any interest on purchases and/or balance transfers in that period. That could be one pretty good method of financing big purchases or paying off outstanding debt without building up extra interest.
But you got to understand what those offers are saying. This 0% APR is temporary and there will be a much higher APR once that introductory period lapses. If you haven’t paid off your balance by that period, it can very well hit you with substantial interest charges. Have a plan to pay off the balance before the introductory period has expired.
Avoid Cash Advances
Cash advances also tend to have very high APRs-frequently starting at 25% or higher-and there usually is no grace period, either. You also can be assessed a 3-5% fee of the amount that you cash advance. With affiliated costs like these, it is prudent to avoid using your credit card to make cash advances unless absolutely necessary.
Watch Out for Credit Utilization Ratio
That means your credit utilization ratio-what percentage of credit you are using versus what’s available to you-can go toward determining your credit score and, by association, your APR. The higher the credit score, the lower your APRs can be. Keep your credit utilization below 30% to retain an excellent credit score and, by association, lower interest rates.
Negotiate a Lower APR
If you have been a responsible borrower and have reflected good credit history, then you may negotiate for a lower APR regarding your credit card with the credit card issuer. You can call your lender and explain the situation to them. There is no assurance that they will agree to giving you a better rate, but it’s always worth asking especially if other companies have made you more attractive offers.
APR and Your Finances
APR can do some pretty dramatic things when it comes to your finances-especially if one carries balances over from month to month. High-interest rates balloon what once was a manageable amount of debt into a phenomenal and crippling financial burden. Here are a few ways in which APR may just affect your financial health:
Increased Debt Over Time
APR is compounded daily, and that only means with the more time you carry a balance, the more interest accrues. This starts a snowball effect that builds up debt faster than paid-off and gets one into the vicious circle of debt.
Loss of Ability to Save and Invest
The more you pay towards interest, the less you have available to save and invest. High APRs make it tough to build up an emergency fund, contribute to retirement accounts, and put money into other financial goals.
Damage to Your Credit Score
Having a high balance relative to your credit limit lowers your credit score, which can raise future APRs for credit accounts. A low credit score might even impact your ability to get loans, apartments, and sometimes even jobs.
How We Came Up with These Ideas
Our financial research team has closely studied the credit card trend, influence of APR, and consumers’ behaviour over these years. We knitted deep knowledge with real-life scenarios to make this guide.
We can only imagine how most people suffer when it comes to credit cards; even more, we want to help provide clarity and actionable advice that will enable one to make informed choices about one’s future.
Conclusion
A good understanding of what credit card APR is and how it works, using 0% introductory offers more judiciously, avoiding paying any APR by paying your balance in full, and even refraining from cash advances are the best ways you can manage your credit well. That way, you’ll be able to keep your credit card costs down and, correspondingly, protect your financial health.
Just remember that not paying APR means, in fact, nothing but being well aware and committed to using a credit card. Monitor your spending, pay on time, and at all times be fully aware of all terms and conditions of every credit card agreement that you have.
Translating these into action would imply achieving facilities of credit cards without falling into high-interest debt traps.
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