What is APR?
The annual percentage rate is an annualized calculation of how much a loan or credit line is going to cost. APR is different from the interest rate, which is calculated in monthly terms.
Components of the APR
APR starts with the basic interest rate. Creditors then add the annual costs of various fees that are determined by the type of credit you receive and the specific company. Such fees usually include:
- Annual credit card fees
- Discount points
- Loan broker fees
Credit Card APRs
You'll most likely come across APR when applying for or owning a credit card. However, did you know that one card can have multiple APRs? For instance, some card companies charge different APRs for purchases and balance transfers and some apply penalty APRs for late payments and on delinquent accounts. Some offer a low promotional APR for an introductory period that increases after a certain amount of time. Paying more than the minimum payment due can help you save money by allowing you to pay down your balance faster, and you can usually avoid paying interest by clearing the full balance each month.
Some credit cards have a variable APR, which changes without warning based on a fluctuating market index such as the prime rate or Treasury bills. A fixed APR, on the other hand, remains in effect for at least 12 months and you must be notified of any adjustments at least 45 days in advance.
Federal law requires credit card issuers to provide a comprehensive explanation of your APR with your credit card agreement, so examine your paperwork thoroughly to ensure that you're fully informed.2
With credit cards, lenders are required to disclose the APR and all included fees.
While your monthly payment is based on your interest rate, APR can provide you with more complete information about how much your credit actually costs. Understanding the ins and outs of APRs can help you compare products and make more informed decisions about your credit.1