APR is the short form for Annual Percentage Rate. It is the interest rate charged on a loan or credit card account. Read on to learn more about APR and what is a good APR for a credit card?
Calculating APR
The APR is calculated in the following manner:
For Loans
The interest rate for the loan is divided by the number of periods in a year. For example, if you take a loan at 10% per annum and repay it in three equal installments of principal and interest, your annual rate will be 10/3 or 3%.
Credit Cards
For Credit Credit Cards, the APR is calculated as follows:
The finance rate charged on a given credit card account is divided by 12 to arrive at its annual percentage rate (APR). For example, if you have taken a credit card with an interest rate of 20%, your APR would be 1/12 × 20% = 2%.
What is Considered the Ideal APR For Credit Cards?
The ideal APR for credit cards is less than 10%. This means a person should pay back the borrowed amount within 18 months. If you are paying off your credit card debt in 24 months, then your credit card interest rate is too high.
Generally, the higher the APR of a loan or credit card, the better it is. This is not true. A loan with an APR of 4% may be cheaper than one with an APR of 8%. When taking a loan or going for a credit card account, the critical factor is how quickly you can settle your debt. The lower the APR, the faster you can pay your debt and begin saving money on interest payments.
How to Calculate Interest on Credit Card Charges?
Let’s say that you have a credit card with a balance of $1000. The credit card charges an interest of 20% per annum. You will have to pay $200 as interest on your debt in the first year.
If your payment is made on time, the credit card company will not charge you any late fees or service charges. If your payment is made late, you will be charged a late fee and interest on the amount due for payment that wasn’t paid in time.
Suppose your monthly payment was $100 and was delayed by two months. In that case, you would have to pay an additional $50 as late fees and interest charges (Late fees are usually around 2%-3% of the outstanding debt, while interest charges are calculated at the rate fixed by the bank).
Apart from the interest, you will also have to pay an annual fee for using the card. The annual fee is usually charged as a percentage of the outstanding balance. For example, if your credit card charges a yearly fee of $50 and your due balance is $1000, then you will have to pay $5 as an annual fee. As per the professionals at SoFi, “Lenders will also take into account the current U.S. prime rate, which is used to set rates on consumer loan products.”
If you have a credit card with a promotional APR (like 0% for six months), you should be sure that there is no interest charged on your purchases during this period. You should also check with your credit card company about renewal fees or penalties if you decide to keep the promotional rate after six months.
