APR stands for Annual Percentage Rate of charge. The APR of a credit card determines how much you have to pay each month. Put simply, the APR of a credit card is the monthly interest charge multiplied by twelve months. A simple example of this would be a credit card with an APR of 10.2%. Divided by 12, this would mean that the interest would be 0.85% of your outstanding balance that month. Therefore, monthly interest on a balance of 1000 with 10.2% APR would equal 8.50. The total amount of interest you pay over the year will depend on your outstanding balance and how much you pay off each month. It means that when choosing a credit card, you can use its APR to compare with different cards, but the annual amount of interest you will pay depends on your monthly repayments and balance.
APR can be used to compare different credit and loan offers and includes such important factors as: The interest rate you have to pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments and amount of each payment, fees associated with the loan, premiums for payment protection insurance that the lender may choose to make compulsory All lenders have to tell you what their APR is before you sign any agreement, and as the APR has a direct bearing on the cost of your credit card loan, it pays to shop around before you decide on one particular card. There are plenty of very good offers available, if you're prepared to do your homework.
Once you have found an attractive APR rate that suits your purpose, there are a couple of extra questions to ask the lender before signing. The first is whether the APR is fixed or variable. If it's variable, what may seem like a tempting offer to begin with could have a nasty sting in its tail as the interest charges can go up as well as down. A variable rate is subject to influence from the Bank of England's base rate and other market forces, meaning some credit card interest rates can change from one month to the next. This can be a good thing in a buoyant economic market, but could cost you more if the economy takes a dive. With a fixed rate the payments stay the same, regardless of outside market influences, but can be higher overall, depending on the of length time taken to pay back the loan.
Look closely for hidden costs that are not included in the APR, the most common being payment protection insurance. With some lenders this isn't an optional extra - it's a requirement. It can offer you a measure of protection should your circumstances change, but there's always the chance that you'll be paying for an insurance policy that you don't actually need. Again, these charges are fully disclosed by the lenders - it's up to the consumer to make the decision as to whether they need the additional insurance or not. It's also a good time to check that your finances could cope with the additional expense of a credit card and the repayments incurred. A longer term repayment timescale may seem tempting because of lower APR, but factor into that equation the length of time you will be repaying both the loan and the interest charges and it could work out more expensive than you thought.
Finance and lending is a complex area, and APR is no exception. The Government and financial regulatory bodies recognise this, and have put safeguards in place to protect consumers to make sure that all lenders comply with basic guidelines. The lenders, in return, are happy to comply with this stipulation, as it shows the public that the credit card companies are open and accountable. The APR attempts to create a single figure of interest on a loan amount, so that consumers can compare companies offering the same amount. The loan amount doesn't change - the APR is the variable in the equation. By shopping around, consumers can find the best deal with the lowest overall APR. The same applies to credit cards. Many cards offer 0% introductory periods and then either a fixed or variable amount of APR once the introductory period has expired. The trick here is to look past the initial incentive of 0% and calculate what the later APR rate will mean to your repayments.
Without looking closely at differing APR rates, it is impossible to make quick comparisons between alternative financial products. All companies use different calculations to determine their interest and other charges. To get the best credit card deal, a little research into how each company calculates that interest will save the consumer being lured into an expensive honeytrap by the promise of an initial interest-free period, only to get stung by a high APR once the honey has run out. There are plenty of good deals to be had on credit cards, and a smart consumer will be able to find one that suits both their budget and their requirements.
APR can be used to compare different credit and loan offers and includes such important factors as: The interest rate you have to pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments and amount of each payment, fees associated with the loan, premiums for payment protection insurance that the lender may choose to make compulsory All lenders have to tell you what their APR is before you sign any agreement, and as the APR has a direct bearing on the cost of your credit card loan, it pays to shop around before you decide on one particular card. There are plenty of very good offers available, if you're prepared to do your homework.
Once you have found an attractive APR rate that suits your purpose, there are a couple of extra questions to ask the lender before signing. The first is whether the APR is fixed or variable. If it's variable, what may seem like a tempting offer to begin with could have a nasty sting in its tail as the interest charges can go up as well as down. A variable rate is subject to influence from the Bank of England's base rate and other market forces, meaning some credit card interest rates can change from one month to the next. This can be a good thing in a buoyant economic market, but could cost you more if the economy takes a dive. With a fixed rate the payments stay the same, regardless of outside market influences, but can be higher overall, depending on the of length time taken to pay back the loan.
Look closely for hidden costs that are not included in the APR, the most common being payment protection insurance. With some lenders this isn't an optional extra - it's a requirement. It can offer you a measure of protection should your circumstances change, but there's always the chance that you'll be paying for an insurance policy that you don't actually need. Again, these charges are fully disclosed by the lenders - it's up to the consumer to make the decision as to whether they need the additional insurance or not. It's also a good time to check that your finances could cope with the additional expense of a credit card and the repayments incurred. A longer term repayment timescale may seem tempting because of lower APR, but factor into that equation the length of time you will be repaying both the loan and the interest charges and it could work out more expensive than you thought.
Finance and lending is a complex area, and APR is no exception. The Government and financial regulatory bodies recognise this, and have put safeguards in place to protect consumers to make sure that all lenders comply with basic guidelines. The lenders, in return, are happy to comply with this stipulation, as it shows the public that the credit card companies are open and accountable. The APR attempts to create a single figure of interest on a loan amount, so that consumers can compare companies offering the same amount. The loan amount doesn't change - the APR is the variable in the equation. By shopping around, consumers can find the best deal with the lowest overall APR. The same applies to credit cards. Many cards offer 0% introductory periods and then either a fixed or variable amount of APR once the introductory period has expired. The trick here is to look past the initial incentive of 0% and calculate what the later APR rate will mean to your repayments.
Without looking closely at differing APR rates, it is impossible to make quick comparisons between alternative financial products. All companies use different calculations to determine their interest and other charges. To get the best credit card deal, a little research into how each company calculates that interest will save the consumer being lured into an expensive honeytrap by the promise of an initial interest-free period, only to get stung by a high APR once the honey has run out. There are plenty of good deals to be had on credit cards, and a smart consumer will be able to find one that suits both their budget and their requirements.
About the Author:
Jo Smart is a financial author that enjoys taking time to break down the facts about credit cards and other personal finance options. You can find out more about Low APR Credit Cards and other Credit Cards here.
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