The annual percentage rate can make most people feel like they need to do math. It's a complicated method that credit card companies use to figure out how much interest to charge you each month. The problem is that this makes the annual percentage rate, or APR, a very important number if you use your credit card. So it's just as important for you to know how the annual percentage rate is calculated, even if it's just the basics.
First, you need to find out what the annual percentage rate means. If you look at the APR this way, it's pretty easy to understand. By definition, the annual percentage rate is the interest rate that your credit card charges you for the whole year, including any fees and costs you have to pay to get the loan. Whether you believe it or not, the credit card companies figure out this loan in a pretty simple way. They look at the average interest rate that has been added up over the length of your loan. So, you can compare different loans or credit card debts.
In this way, the annual percentage rate charged by a credit card company is the same as the annual percentage rate charged by, say, a mortgage company. But things are different when you get a mortgage. In the case of a mortgage, for example, the APR includes not only the interest rate but also the mortgage insurance, certain closing costs, and even points paid at the time of closing.
As with mortgage companies and other lenders, credit card companies are required by law to always tell you what your APR is. So, when you're looking for a credit card, you can compare them based on their APRs. If you plan to keep a balance on your card or move it from one card to the next, you'll know roughly how much you could save from one month to the next.
When comparing credit cards, of course, there are even more things to think about. In addition to the APR, you should look at the card's payment schedule. How long do you have to pay off a purchase, and what is the penalty if you don't pay on time or don't pay at all? Also, you should look at the reward programmes that come with each card. How many points or dollars do I get for each dollar I spend? Is it $1 for 1 point? Do you get 1% cash back or 5% cash back? All of these things should be taken into account, as well as the annual percentage rate.
