Credit Card 101: What is an APR?

July 18, 7:46 PMSF Personal Finance ExaminerBarbara Bryn Klare

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The Annual Percentage Rate (APR) is the cost you pay for borrowing money using your credit card - i.e., carrying a balance on your credit card. This cost is calculated as a percentage of the amount you borrow, expressed annually. For example, an APR of 18% means that the cost of borrowing $1,000 dollars is $180 for one year. If you carry a large balance from month to month, even a small difference in the APR can make a big difference in how much you will pay over a year.

To calculate your finance charge or interest each month, credit card companies use the APR and a monthly or daily rate (a "periodic rate"). Let's say your account balance is $200 and your APR is 18%.

• To calculate the monthly finance charge using a Monthly Periodic Rate, multiply the Average Daily Balance by the Monthly Periodic Rate.

EXAMPLE: 18% divided by 12 = 1.5% and $200 x 1.5% = $3.00

• To calculate the monthly finance charge using a Daily Periodic Rate, divide the APR by the number of days in the year (365), then multiply the result by the number of days in the billing cycle.

EXAMPLE: 18% divided by 365 = .0005 (or .05%) and .05% x 30 = 1.5% and $200 x 1.5% = $3.00

Many credit cards offer one APR for purchases and a different (often higher) one for balance transfers or cash advances. APRs come in many different flavors, and can be tiered depending on the level of your balance ("17% on balances above $500") and can increase if your payments are late (a penalty rate or Default APR).

Credit card companies are required to disclose the APR before your credit application is finalized. They are also required to publish the APR on your credit card statement each month. Make sure you check the rate on the regular basis, since the APR can change often, even when it is defined as a fixed (not variable) APR.

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 © 2009 Barbara Bryn Klare. All Rights Reserved.