Be it a personal loan or a credit card, everything attracts a certain amount of interest rate. The only difference is that you need to pay interest amount for a loan even if all your dues are paid on time. When it comes to credit cards, your due amount won’t attract any interest if you pay all your dues in full on time. Even if you pay your credit card dues on time, you still should know a few terms related to credit cards and interest rates for a better understanding. APR or Annual Percentage Rate is one such term which many people are not aware of.
Today’s article will give you a better understanding about APR and how it is calculated.
What is APR on credit cards?
APR in credit card means the cost of borrowing that the users need to pay on yearly basis. It is basically the yearly interest rate credit card companies charge if you have an outstanding balance past the due date. The APR varies from card to card and issuer to issuer.
For example: Your one credit card may have an APR of 11% while other is 15.6%.
Therefore, you should always enquire about the APR before taking a credit card.
How is APR determined for every customer?
APR is not fixed for every user. It largely depends on your credit score.
Before issuing any credit card, the issuer company does a thorough check of your credit report and score. There are many types of scores which are taken into consideration like CIBIL, Equifax, etc. If your credit score is high, your APR is likely to be lower. But if your credit score is low due to some reasons, your APR will be higher.
Other than this, your APR can also be variable in nature depending on the various other factors.
What are a few types of APR?
Credit Card users should also know that there are various types of APR which a credit card company can charge. Let’s look at the different types of APR in detail.
As the name suggests, Purchase APR is one of the most common interest rate a credit card company charges to its users. It is determined on the purchases we make or things we buy using the credit card. Normal shopping, entertainment, clothing, etc., attract Purchase APR, if the bill is not paid in full before the due date.
Many users use credit cards to transfer or withdraw cash. Such activities on credit cards attract higher APR rate. The Cash APR is charged on the total amount you have withdrawn as cash. It is calculated on daily basis after the grace period to pay the due amount is over.
As you know, every credit card offers users the option to just pay the minimum due amount instead of the whole due amount in one go. If you miss payment for 2 consecutive minimum dues, penalty APR will be charged on the outstanding amount.
This type of APR is higher than any other APR rates.
Many credit card issuers try to attract new customers by keeping their APR less than the card’s normal APR. Sometimes, these cards are also 0 APR credit cards. It means the credit card company doesn’t charge any APR for the starting period. This introductory offer comes with a deadline. Once it’s over, your card will be charged normal APR.
These are a few types of APR which are charged on a credit card. You should be well aware of the rates to spot any discrepancy in the due amount.
Did you know you can use APR to calculate your credit card interest! Read on to know the detailed steps to calculate your monthly interest charges.
How to calculate credit card interest with APR?
Your credit card issuer always informs you in their terms and conditions document about the APR for that card.
You can use the rate to calculate your monthly interest rate. Most of the credit card companies use Daily Periodic Rate or DPR to calculate the interest you owe. DPR is determined by dividing APR to number of days in a year. Some banks consider it is as 360 and some take it as 365 days.
The DPR is expressed in percentage. Once that’s calculated, you should multiply it with the number of days in billing cycle and your Average daily balance. (Average Daily Balance or ADB is your card’s due balance at the end of each day)
Apply this formula:
DPR X Billing Cycle X ADB = Monthly Credit Card Interest
Hope now you know all about APR and how it is calculated. We advise you pay your due amount before the due date to avoid any interest rates for your credit card.
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