Just how much a credit card balance is costing you depends on your card’s annual percentage rate or APR.
Just what is APR? The APR is the yearly interest rate on a credit card. Take a close look at your credit card monthly statement and you will see that your credit card issuer may charge different APRs for different credit card transactions such as purchases, balance transfers and cash advances.
A card issuer also may charge you a penalty interest rate APR if you fail to pay your card account as agreed.
The Difference Between Variable and Fixed Rates
Variable rate credit cards are tied to an index such as the U.S. prime rate. And when the prime rate changes, credit cards linked to the prime rate will change as well. A card with a variable APR may change monthly, quarterly or at another interval disclosed in your cardholder agreement.
The rate on fixed rate or non-variable credit cards is not tied to an index but it is possible for this rate to change, as well. Fortunately, your card issuer is required by law to give you plenty of notice before doing so.
According to the Credit Card Accountability, Responsibility and Disclosure Act of 2009, (the Credit CARD Act), a card issuer must generally provide 45-day advance notice of any interest rate increases.
How Monthly Finance Charges are Calculated
Most credit card issuers use a daily periodic rate to calculate interest charges on your credit card account for each month that you carry a balance. The formula for the daily periodic rate (DPR) is simple. It’s the APR for your credit card transactions divided by 365.
So the higher your APR the more interest you will pay when you carry a card balance.
Your average daily balance and the number of days in your card’s billing cycle are other key factors determining your monthly finance charge.
When choosing between credit card offers, it’s always a good move to go for the card with the lowest APR, especially if you plan to make big purchases that you plan to pay off over several months. You’ll save money every time you carry a balance.
To qualify for a credit card with a low APR, you’ll need good credit. You can check your credit score for free using Credit.com’s free credit report card. You’ll also receive free tips and advice on improving your credit score.