How Your Credit Card's APR is Calculated
If you have a credit card or are planning on opening one, then you need to know what an annual percentage rate (APR) is and how it affects your financial future. You will see the word APR attached to financial products like credit cards or mortgages if you borrowed money from a bank or another lender.
An APR is an annual rate that credit card companies charge you on any outstanding balances that you carry month-to-month. Sometimes you may be offered an introductory 0% APR rate for a certain amount of months before your APR adjusts to a higher rate. The APR offered to you depends on your credit score. People with better credit scores will generally obtain lower rates, while those with lower credit scores will be more likely to have higher rates.
- Your credit card bill is $500 at the end of the month.
- The minimum payment is $50.
- Instead of paying off the bill in full, you only pay the minimum payment, which leaves an outstanding balance of $450.
- The credit card's APR is 18% or 0.18.
Calculate the money you will pay in interest on the outstanding balance of $450:
0.18 x 450 = 81
You will pay an additional interest payment of $81 each year until your balance is paid off in full.
You will pay an additional interest payment of $6.75 each month until your balance is paid off in full.
Credit card APRs are important to know because they will help you calculate your monthly bill and understand how much you are paying towards your principal balance and interest on any remaining balances.
What have your experiences been with your credit card’s APR?