Understanding APR (Annual Percentage Rate)

Introduction

• Topic: APR (Annual Percentage Rate)
• Relevance: Important for anyone using or considering a credit card

Basics of APR

• Definition: The cost of borrowing money on a credit card
• Interest: The fee charged by credit card companies when you borrow money

Calculation of APR

• Annual Rate: Example: 20% APR does not mean 20% charge on everything bought
• Daily Periodic Rate: APR is divided by 365 (days in a year) to calculate a daily rate
• Daily Compounding: Interest is compounded daily, meaning interest is charged on accumulated interest
  • Example: If daily rate is 0.055%, balance increases incrementally
  • Effect: Over time and with larger balances, compounding significantly increases the total interest paid

Managing Interest Charges

• Paying in Full: No interest charged if the full balance is paid by the due date
  • Advice: Always aim to pay off the full statement balance to avoid interest charges
• Credit Score: Paying off balances helps build a good credit score

Types of APR

• Introductory APR: Lower rate offered for a limited time when a card is first acquired
  • Caveat: Rate increases to regular APR after introductory period ends
• Balance Transfer APR: Applies to balances transferred from one card to another
  • Note: Can differ from the purchase APR

Benefits of Credit Cards

• Rewards: Cash back and other reward programs
• Credit History: Essential for renting, loans, buying homes, etc.

Conclusion

• Goal: Use credit cards to your advantage by understanding APR and managing balances wisely
• Key Tip: Always strive to pay off full statement balance each month to avoid interest charges.