Ineterest Rates

The Complete Guide on Credit Card Interest Rates and APRs

The annual percentage rate (APR) is what your lender charges you to borrow money. Everybody knows the basics: the lower the APR, the better, but most of you are still oblivious to how it works. This guide discusses different types of credit card APRs in depth.

Credit Card APR Types

When you take out a loan, the total cost of your loan is determined by adding up both interest rate and annual percentage rate.The interest rate is the cost you pay on the top of the money you borrow. Interest is charged to maintain the present value of money – a pound today is worth more than a pound tomorrow. It can be either fixed or variable. You will pay interest every month.

Annual Percentage Rate

APR is a broader term; it involves interest rates plus other fees such as broker fees, and other charges. It is always higher than interest rates.

Your credit score estimates the interest rate. The Interest Rates is inversely proportional to the Credit Scores. Since the APR consists of fees and other charges, it varies from lender to lender. Every loan company is responsible for disclosing APRs on the agreement.

Multiple credit cards carry various interest rates, and all of them apply to different situation

  • Purchase APR – This is the interest rate that you pay on every purchase made through your credit card.
    Balance transfer APR
    This interest rate is charged when you transfer your credit card balances to a new one. It helps you save money because you get the new deal at lower APR.

Cash advance APR

      • – You will pay the penalty if you use your credit card to withdraw money. The APR is higher than the purchase APR.

Penalty APR

      • – The credit card issuer will impose the penalty if you fail to clear all your dues on time.

APR Grace Period

Every financial institution provides a grace period to credit card borrowers, which may be 25 to 30 days depending on the policy of lenders. You will not pay off interest if you settle your account within the grace period.

How do Lenders Determine Credit Card APR?

Your creditworthiness decides credit card APRs. Every lender will provide you with financial assistance with the hope that you will pay back. Not all borrowers behave responsibly when they take out a loan. A financial institution will run a credit check to know your score. The higher the score, the lower the APR you will pay.

Your lender or bank can raise the APR anytime without giving you a prior notification if you are running behind your payment dates. As you make default, the penalty APR kicks in.

Credit card APRs vary from lender to lender. Some credit cards carry low-interest rates, and some carry high-interest rates. It all depends on the type of credit card you apply for.

How is APR Calculated?

Keeping a credit card sounds very good to borrowers because they are ignorant about the method it uses to add up your bills. At the end of every month, a fee is added to your outstanding balance. For instance, you have a credit card with a 15% APR. Imagine your card has a balance of £1000. Your credit card company will charge a nominal amount of interest daily, for instance, .040%. At the outcome of the month, the balance turns to £1012. Further, when you pay off outstanding balance, your loan company will apply the lowest interest rate to minimum payment, and the rest amount will be charged a high rate of interest.

How Can You Get the Lower APR?

High APR on a credit card can wreak havoc on your finances. You should consolidate your credit card balances at 0% interest rates. However, this facility comes for a limited period. If you do not settle your whole debt within the given time, you will end up paying high-interest rates.

If you want to escape penalties, make sure that you clear all your bills on time. Credit scores play a paramount role in deciding on APR. Even one late payment can pull your score. Repay your debt on time. You can manage your repayments easily if you keep tabs on your spending.

Every credit card comes with a specific limit. Do not ever try to max out your card; otherwise, your lender will presume you rely on borrowings only. Make sure that you do not consume more than 30% of your card limit.
If you are looking forward to applying for a loan or a new credit card, contact one or two companies. Multiple hard inquiries in a short period deteriorate your credit score.

DEBT MANAGEMENT IS NOT ROCKET SCIENCE. Focus on building up your credit score, and you will get credit card deals at lower interest rates.

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