There are various key terms related to credit cards that can affect finances very much, annual percentage rate or APR is one of them. APR is considered to be one of the deciding factors that decide which credit card is more beneficial to customers. But what makes APR so important? The answer to that is in this blog post, after reading this blog post I'm sure that you'll get all your answers.
The annual percentage rate is considered to be important because it determines the value of borrowing money on your credit card. Let us now take a look in depth at the APR so that you can make financial decisions that will benefit you in the future. Let us start from the basics and get to know APR in depth.
What Is APR?
APR generally stands for "Annual Percentage Rate". This is a financial term that is mostly used with credit cards. Generally, APR is the universal way of expressing the value of money that is borrowed over a year, this money or cost includes both the interest rates as well as various fees which are associated with a credit card or loans.
By looking at the APR we can get a clear image of what is the actual cost of borrowing than just the interest rates alone. This is because APR consists of both the interest rates as well as various fees which are associated with a credit card or loans. APR is an essential tool in the financial market because by looking at APR we can compare loans and credit cards.
Now after knowing the true meaning of the annual percentage rate, let us look at how does apr work on credit cards?
How Does Annual Percentage Rate Work on Credit Cards?
As we know that APR represents the total cost of borrowing which means that by looking at APR we can find out which credit card works best for us. By understanding how APR works we can manage our finance better than before. So without wasting any more time let us look at the working of the annual percentage report.
1. Interest Charges on Balances
Let us understand interest charges on balances by an example. Suppose you're carrying a balance from one cycle of billing to another cycle then the credit card company will charge you interest on that balance. This interest rate is calculated by using APR which is later expressed as an yearly percentage rate.
This interest rate is calculated by using the annual daily balance method in which the credit card issuer adds up the remaining balance of each day of the current billing cycle and divides it by the number of days in the billing cycle.
2. Different Annual Percentage Rates for Different Transactions
Before getting a credit card make sure to read your credit card agreement carefully because various types of APRs are applicable on credit cards. For example, cash advances have different APRs, another APR for balance transfers, and yet another APR for purchases.
All the APRs which apply to your credit card are mentioned in your credit card agreement so you should make sure that you read your agreement carefully to avoid any trouble in the future.
3. Introductory and Promotional APRs
Some credit card companies offer promotional or introductory APRs to attract new cardholders. These introductory and promotional APRs generally offer lesser interest rates than conventional APRs moreover these APRs are only applicable for a short duration of time which is generally six months or a year.
4. Grace Period
Few credit cards offer a grace period. The grace period is the period in which you can pay your debt and if you pay your debt in this period you won't be charged. The duration of the grace period may vary from company to company and it is generally 21 to 25 days.
Moreover, the balance you are about to pay in this period is free from any interest rates which makes your debt a little less. However, there are only a few credit card companies that offer you a grace period to pay off your debt.
5. Accrued Interest
This is the main working model of an annual percentage rate, we can understand this model by a simple example. Suppose you don't pay your debt in a current billing cycle then this debt will get added on to the next billing cycle which in turn increases your debt and it continues to grow on the unpaid portion.
This is all you need to know about the working of the annual percentage rate. Our team of experts did a lot of research and try to explain everything in detail without giving any unnecessary information.
What’s a Low APR for Credit Cards?
As the name suggests a low annual percentage rate for a credit card refers to the lower-than-average interest rate which is applied to the outstanding balance of money on a credit card. Those credit cards which have lower APRs will charge less interest rates on the outstanding balance making the credit card bill less expensive.
but what is the meaning of a "low" APR credit card? Well, the answer to this question generally depends on various aspects such as the credit card market, interest rate environment, and regional regulations. On the other hand, the general characteristics of credit cards with low annual percentage rates are given below.
1. Introductory Offers
Some credit cards offer various introductory offers which will help to reduce the annual percentage report to some extent. The best thing about these offers is that these offers are valid for a limited amount of time which is generally six months to a year. These offers are introduced by credit card companies so that they can attract new cardholders and generate profit.
2. Balance Transfer Offers
Certain credit cards offer very low APRs and some credit card even offers 0% APRs. But wait these low APRs are only applied on balance transfers that only for a short amount of time. This feature is a boon to various individuals as they can shift from higher APR credit cards to Lower APR cards without paying too much interest rates.
If you also want to shift from your high APR card to a low APR card then you can also shift but keep in mind that these rates are valid only for a short duration of time.
3. Credit Cards for Excellent Credit
There are various banks and financial institutions that offer low annual percentage rates only for those individuals that have an excellent credit history with a good credit score. Not only have low APR these financial institutions might offer you various other benefits as well. Hence we can say that having a good credit score can save you a lot of trouble.
4. Low-Interest Rate Cards
Various credit cards are specifically designed and marketed as low annual percentage cards. But these cards might have some drawbacks like they do not have as many rewards and benefits as of a high annual percentage card credit card. The sole purpose of these cards is to provide low-interest rates to customers.
5. Credit Union Cards
Various credit unions offer cards with competitive interest rates. These credit unions provide these cards with such low APRs because they are not-for-profit organizations the sole purpose of these credit unions is to provide the best service and interest rates to their customers. Hence you can consider getting a card from a credit union rather than bug financial institutions or banks.
What’s a Good APR for Credit Cards?
A good annual percentage rate credit card falls in the category of low-interest rate credit cards. Various criteria define what is a good annual percentage rate credit card. This includes various factors like the credit card market, interest rate environment, and regional regulations. Here are some general characteristics of a good annual percentage rate credit card.
1. Excellent Credit
There are various credit card companies and financial institutions that provide individuals who have a good credit score and a history with lower interest rates than the national average. A score above 750 can be regarded as a good credit score. Not only have low APR these financial institutions might offer you various other benefits as well. Hence we can say that having a good credit score can save you a lot of trouble.
2. Good to Above-Average Credit
If your credit score lies within the category of 670-749 then you have a good credit score and various financial organizations provide you with various rewards and benefits even in this category. The interest rates of around 15-20% can also be considered a good interest rate in this category. These interest rates are generally lower than the interest rates which is provided to individuals with a poor credit history.
3. Average Credit
If your credit score is in the range of 580-669 category then sorry to say you have an average credit score. If you want to get a credit card with a low APR then we would like to suggest that you should consider increasing your credit score which will help you to get a credit card with a good APR. In this range, you get interest rates of around 20-25% or higher.
What’s a High APR for Credit Cards?
The high annual percentage rate is a nightmare for credit card holders. A high annual percentage rate refers to the interest rate which is applied to the outstanding balances on the card. These high APRs can result in making your balance grow exponentially by charging the interest rate on the balance amount that you owe. This makes carrying a balance from the previous month to the upcoming month more expensive.
Well, there is no proper definition for what you call a "high" annual percentage rate for credit cards. But various factors influence an annual percentage rate to grow higher like regional regulation and interest rate environment.
1. Subprime or Risky Credit Cards
There are various credit card unions and financial institutions that provide credit cards to those individuals that have low or poor credit scores at high APRs. They provide cards with such high APRs because they consider individuals with poor credit history a risky investment for lenders, hence they charge high APR for such individuals.
2. Store Credit Cards
There are various retail credit card stores or credit unions that provide credit cards with high annual percentage rates to even those individuals that do not have a good credit history. But the credit card that they provide comes with a higher annual percentage rate as compared to other credit cards with lower annual percentage rates. They provide cards with such high APRs because they consider individuals with poor credit histories a risky investment for lenders.
3. Cash Advances
Cash advances from various credit card unions and financial institutions come with a generally high annual percentage rate as compared to other transactions. The reason behind this is that cash advances are considered the most risky transactions for lenders. So they want fewer and fewer people to use cash advances which is the reason they charge a high annual percentage rate on credit cards.
4. Credit Builder Cards
Well if you have a low credit score and want to build your credit score then various cards are available for you in the market that will help you to build your credit score. But these cards have a generally high annual; percentage rate as compared to other credit cards which have normal to low annual percentage rates. Lenders provide cards with such high APRs because they consider individuals with low credit scores a risky investment.
5. Credit Cards with Rewards or Benefits
Various credit cards are available in the market that comes with various benefits and rewards. But since credit cards are a financial product that is provided by financial institutions hence it is obvious that if they are providing individuals with such great rewards and generous benefits, they will charge you a high annual percentage rate.
Read Also:- 5 Major Factors That Affect Your Credit Score
Frequently Asked Questions (FAQs)
Here are some frequently asked questions.
1. What Is the Annual Percentage Rate?
This is a financial term that is mostly used with credit cards. Generally, the annual percentage rate is the universal way of expressing the value of money that is borrowed over a year, this money or cost includes both the interest rates as well as various fees which are associated with a credit card or loans.
2. How Important Is Annual Percentage Rate?
As we said by looking at the APR we can get a clear image of what is the actual cost of borrowing than just the interest rates alone. This is what makes APR so important. Moreover, by looking at APR we can actually compare different credit cards.
3. Which Is Better High APR or Low APR?
Well, the simplest answer to this question is that a low APR is definitely better. This is because high APR might have perks but the interest rates are also higher which grows over time exponentially, hence it is important to always look for credit cards with low annual percentage rates.
We are glad to see that you made it to the end of our blog post. If you're here that means you like our blog post. we shape that you get all the answers that you were looking for. Kindly tell us in the comments about your experience while reading it.
In conclusion, there are various key terms related to credit cards that can affect finances very much, annual percentage rate or APR is one of them. The annual percentage rate is considered to be important because it determines the value of borrowing money on your credit card.
APR generally stands for "Annual Percentage Rate". By looking at the APR we can get a clear image of what is the actual cost of borrowing than just the interest rates alone. This is because APR consists of both the interest rates as well as various fees which are associated with a credit card or loans. APR is an essential tool in the financial market because by looking at APR we can compare loans and credit cards.
It will be a wise decision to bookmark this article because we will keep on updating this article from time to time so that you can the latest updates related to the annual percentage rate.