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Understanding Credit Card Interest Rates

26 July, 2011

APR or Annual Percentage Rate determines the total cost of your credit in terms of annual rate. You should carefully understand the APR and different facts related to it.

Different APRs on Various Transactions

Usually creditors allow users to use their credit cards with full freedom by giving them introductory APRs on various transactions. Promotional APRs mean that you have a lower APR on various kinds of transactions for a particular time period. The APR returns to the original point after the end of promotional period. Users can save a great amount of money by using these low promotional rates.

What to Avoid?

You should avoid penalty or default APR. These are usually the higher APRs that are imposed on the late payments. The detail of penalty APRs is within the account agreement.

Fair Comparison of Variable & Fixed APRs

You have different APRs among which some are variable or some may be non-variable. Let’s have a look on the difference between variable and non-variable APRs.

Generally, variable APRs are calculated by the addition of a margin that can be determined by the credit card issuer to the index (also called as reference rate) like the United States Prime Rate. There is a direct relationship of variable APR and the Prime Rate i.e. when the prime rate rises, variable APR rises, however, it is dependable on your issuer that when they update your rates. Your account contract contains information about variable APRs change.

Fixed or non-variable APRs are stable than the latter one because it is not calculated by the index. Unfortunately, it is not guaranteed. This is because many credit card issues have got the legal right to change the fixed APR according to the changes that occur in market or also on the basis of some other reasons. In such a case, your issuers are bound to alert you about the change which they are going to make in fixed APRs.

Calculation of Monthly Interest Charges

The calculation of monthly interest charges is calculated by the Daily Periodic Rate, as each month is different in length. Typically, the DPR is determined by the division of APR by 365 (total days in a year).

The resulting figure is then multiplied by the balance of account and by the total number of days in a cycle of your statement billing. In simpler form look at this formula:

DPR x Account Balance x days in statement billing cycle = interest charge for the statement of the particular month.

Calculating the Balance

A variety of methods are used by the issuers to calculate the balance that will carry the interest charges. Whatever method your issuer will use, it will be identified on the back of your billing statement. Two of the commonest balance calculating methods are adjusted balance and average daily balance. Independent balances having varying APRs are calculated by your issuers.

Payments on Different Balances

Your credit card issuers are eligible to apply minimum payments on your balances having different interest rates. Issuers can apply payments on both balances carrying higher interest rates and with lower interest rates.

After understanding all critical facts related to APRs you can take decisions regarding your spending.

Personal Loan

by Gemma Maddock

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