You’ve probably heard the term “APR” before – but what does it mean? More importantly, why does it matter and how does it factor into your credit card payments?
Let’s start by defining an annual percentage rate (APR). As the Consumer Financial Protection Bureau explains, APR is the price a consumer pays for borrowing money. Specifically, APR is a yearly rate a consumer pays for carrying a balance.
How is this different from an interest rate? When it comes to credit cards, there is no difference – they are the same.
When you take out a mortgage, there are other upfront charges and fees which are added to the APR (for example, you could have a mortgage with 5% interest, but an APR of 5.25%). With credit cards, however, the APR is just interest – things like annual fees, late fees, cash advance charges and so on are impossible to predict, so they are not included in the APR calculations.
The APR is generally easy to find. It must be clearly displayed before a customer signs an agreement. Thanks to digital banking, the information is usually just a click away, and APR and interest charge calculations are a click away on your online billing statements.
Consumers encounter many types of APRs. The more common include:
Regardless of the type of APR, there are a few things to keep in mind. The first is that rates can vary widely — not only among lenders but also due to factors such as credit scores.
Better scores can mean lower rates and other financial advantages. It is also important for consumers to understand and compare rates because, at a baseline, they are the cost of borrowing money.
Now that you know the basics of APRs, read around a little. Check out some terms and conditions, and make sure you understand the implications before you jump into a new loan or credit card agreement.
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