When it comes to credit cards, APR is one of the most important things to understand. APR, or annual percentage rate, is the interest rate that you will be charged on your credit card balance each year. This number can vary depending on the type of credit card that you have and the terms of your agreement with the issuer.
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In this article, we will explain what APR is and how it affects your credit card bill. We will also discuss some tips for keeping your APR as low as possible!
What Is An APR?
The annual percentage rate (APR) is the interest rate that will be charged to your credit card account each year. Your APR will be disclosed to you in your credit card agreement. It is important to review this document carefully so that you understand the interest rate that you will be paying.
The APR is different from the interest rate because it includes any fees that may be charged by the issuer. For example, if your credit card has a $0 annual fee, but the APR is 20%, that means you will be charged 20% interest on your balance each year.
Your credit card bill is composed of two parts: the principal and the interest. The principal is the amount of money that you borrowed from the issuer. The interest is the fee that you are charged for borrowing this money
For example, a typical APR for a rewards credit card may be between 15% and 25%. That means if you have a balance of $1000 (principle) on your credit card at the end of the year, you would owe $150 to $250 in interest charges!
APR is important to understand because it can have a big impact on how much money you owe each month. If you carry a balance from month to month, your APR will affect how much interest you are charged.
For this reason, it’s important to try and keep your APR as low as possible. There are a few ways to do this that we explore in more detail later in this article. But for now, let’s talk about how APR is calculated.
How Is APR Calculated?
APR is calculated by taking the average daily balance of your credit card and multiplying it by the APR.
For example, if you have a balance of $1000 and an APR of 15%, your interest charges would be $150 per year. The actual amount that you are charged each month will depend on when your billing cycle ends and how many days are in that billing cycle. If your billing cycle is 30 days, your monthly interest charges would be $12.50 ($150/12).
How Does APR Affect My Monthly Cash Flow?
When it comes to personal finances, cash flow is everything. This is the money that you have coming in each month and the money that you have going out. Your monthly cash flow is affected by your income, your expenses, and your debts.
Your APR can have a big impact on your monthly cash flow because it affects how much interest you are paying each month on your credit card balance. If you have a high APR, you will be paying more in interest each month. This can make it difficult to meet your other financial obligations.
On the other hand, if you have a low APR, your monthly interest payments will be lower. This leaves you with more money each month to put towards other expenses or debt payments.
For example, let’s say you have a credit card balance of $1000 and an APR of 15%. Your monthly interest charges would be $12.50. Now, let’s say you also have a car loan with a monthly payment of $300.
Your total monthly payments would be $312.50 ($12.50 + $300). If you earn $400 per month, this leaves you with $87.50 of extra cash each month that you can use to pay down your debt or cover other expenses.
On the other hand, if your APR was 30%, your monthly interest charges would be $25.00 ($325 total with car payments). This would leave you with only $75.00 of extra cash each month. As you can see, a higher APR can have a big impact on your monthly cash flow!
Credit Card APR & Debt Cycles
If you carry a balance on your credit cards from month to month, your APR will have a big impact on how much money you owe. This is because the interest charges that you accrue each month are added to your outstanding balance.
This means that if you have a high APR, your debt will grow quickly! It can be easy to get caught in a cycle of debt with high-interest rates. This is why it’s so important to try and keep your APR as low as possible. If you can only pay down your interest, your debt will never go away!
If you miss an interest payment, your APR will also likely increase. This is because your credit card issuer will see you as a high-risk borrower. Higher-risk borrowers are typically charged higher interest rates. So, if you want to keep your APR low, it’s important to make all of your payments on time!
Missing payments will also harm your credit score. This can make it difficult to qualify for other types of loans in the future, such as a mortgage or auto loan. By keeping your APR low, you can afford your payments without having to stress about a poor situation.
This cycle causes many people to spiral into deeper debt that they can never seem to pay off. If you find yourself in this situation, it’s important to reach out for help. Many organizations can assist you in getting out of debt and managing your finances.
However, it’s best to prevent this situation from happening in the first place. Make sure you never use more credit than you can easily afford to pay back. If you’re ever in doubt, it’s better to err on the side of caution and not make the purchase.
Now that we’ve explained what APR is, how it works, and the problems associated with a high APR, let’s talk about how to keep your APR low.
Tips For Keeping Your APR Low
APR is effectively the cost of your debt. There are a few things that you can do to keep your APR low. Here are the top tips that should help you get started.
Tip #1 – Keep Your Credit Score High
One of the biggest factors that determine your APR is your credit score. If you have a high credit score, you’ll likely be offered a lower APR.
So, if you want to keep your APR low, it’s important to maintain a good credit score. You can do this by making all of your payments on time, not using too much of your credit limit, and keeping your credit history long.
Tip #2 – Shop Around For The Best Rates
When you’re looking for a new credit card, make sure you compare APRs. Many credit card issuers will offer different APRs to different customers. For example, some issuers may offer a 0% APR introductory rate to customers with good credit scores.
A common mistake is selecting a credit card with rewards that are enticing but come with an APR that’s higher than other cards. Remember, the APR is the cost of your debt and should be one of your top considerations when choosing a credit card.
Tip #3 – Don’t Be Afraid To Negotiate
If you have a good credit score and history with your credit card issuer, don’t be afraid to negotiate a lower APR. This is especially true if you’re a long-time customer or you have multiple accounts with the same issuer.
It’s also important to remember that you can always shop around for a new credit card if your current issuer won’t budge on your APR. There are plenty of credit cards with low APRs available, so don’t be afraid to switch if you need to. Also, don’t be afraid to let them know that you’re considering switching to another card issuer.
Another effective negotiating tactic is to threaten to close your account. This isn’t a decision to be made lightly, but it may be necessary to get your issuer to lower your APR. If you do decide to close your account, make sure you pay off your balance first. Otherwise, you’ll likely be charged a high-interest rate on the remaining balance.
You can also use your credit history (if you are a good borrower) as leverage. For example, you can say, “I’ve been a loyal customer for __ number of years and have always paid my balance in full and on time. It looks like your company would still benefit even if I had a lower APR, it’s just a win-win for both of us.”
If they still deny your request, feel free to ask if there is anything else they can do to help lower your APR. Many credit card issuers have discretion when it comes to setting APRs, so it never hurts to ask. They might also inform you about a lower APR credit card promotion they have available, which would also be a victory!
Tip #4 – Use a Balance Transfer Credit Card
If you have debt on a high-APR credit card, one option is to transfer the balance to a credit card with a lower APR. This is called a balance transfer.
Most balance transfer credit cards offer an introductory 0% APR period, which usually lasts for about a year. This can give you some breathing room to pay off your debt without accruing any additional interest charges. Just be sure to pay off the balance before the intro period ends, or you’ll be charged a high APR on the remaining balance.
This strategy should only be used if you’re confident you can pay off the balance before the intro period ends. Otherwise, you may end up with even more debt than you started with.
Tip #5 – Pay Your Balance In Full Each Month
This is the best way to avoid interest charges altogether. If you can, try to pay off your credit card balance before your billing cycle ends. This way, you won’t be charged any interest on your balance for that month.
Some credit card issuers offer a grace period, which is the time between the end of your billing cycle and when interest is charged on your balance. Grace periods typically last 21-25 days. So, if you pay off your balance before the grace period ends, you won’t be charged any interest.
Keep in mind that not all credit cards offer a grace period. If yours doesn’t, you’ll be charged interest on your balance from the date of each purchase.
Some credit card issuers also offer a grace period on cash advances and balance transfers. But, these transactions usually start accruing interest immediately, so it’s best to avoid them if you can.
Tip #6 – Be Patient
Sometimes, the best thing you can do is wait. If you have a good credit history, your credit card issuer may eventually lower your APR on their own. This is especially true if you’ve been a customer for a long time or you have a good payment history.
It takes time to build good credit, but you can still speed up the process by using credit responsibly. That means making your payments on time, keeping your credit utilization low, and only opening new accounts when necessary. You should also avoid making hard inquiries on your credit, which can temporarily lower your score.
A soft inquiry, on the other hand, won’t have any impact on your credit score. So, if you’re not sure whether a particular inquiry will be a soft or hard pull, you can always ask the credit card issuer before applying.
If you have bad credit, don’t despair. You can still improve your credit score by using credit responsibly and paying all of your bills on time. It may take a little longer to see results, but it will be worth it in the end.
If you follow these tips, you should be able to lower your APR and save money on interest charges. Just be patient and don’t stress too much if your APR isn’t as low as you’d like it to be. Remember, you can always try again next year.
Conclusion
We hope this article has helped you better understand what APR is and how it works. Remember, APR and credit cards go hand-in-hand. An APR is the cost of borrowing money on a credit card. It’s also important to understand how APR works before you apply for a credit card. Make sure to save this article so you can reference it in the future!