Lets Talk About APR
When you go out to apply for a new credit card, you will come across certain terms and features. These include the rewards and sign up bonus with the credit card. Apart from these, there are other important things too. Among these, one of the most common terms is the APR or Annual Percentage Rate of the credit card.
Most of the people will say that they know everything about the APR on a credit card, including how it is calculated. However, they still may have some confusion. There are still some crucial things related to APR, which you may not know about.
Therefore, in order to make consumers more informed and empowered, we have jot down this guide, which explains everything about your credit card’s APR. This includes when APR is charged on credit accounts and how it is calculated.
When is APR charged?
One of the perks of credit cards is that they offer a grace period to customers. The grace period refers to the time period from the closing of your credit card statement to its real due date. The number of days in an APR depends on the credit card issuer, though it is generally a minimum of 21 days.
Most of the credit cards do not charge any interest, if the cardholder pays the statement balance in full before the grace period finishes. However, the card member is charged interest on the purchases they make, if they pay just a part of their balance prior to the due date.
Remember to read the fine print every time you apply for a new credit card, since it is not necessary that your credit card issuer may offer a grace period. Therefore, you must check if your credit card offers a grace period or not.
How is APR calculated?
APR would be there on your credit card statement, if you carry a balance on your credit card. However, you too can calculate the APR on your credit card. You must know that even though APR stands for Annual Percentage Rate, it is not calculated on a yearly basis; but it is actually calculated on everyday basis. This is called periodic interest rate.
So, for instance, if your credit card has 16% APR, you need to divide 16 by 365 days in order to figure out the periodic interest rate on your credit card. You must know that a few credit card issuers take 360 days instead of 365 days.
This will reveal your period interest rate as 0.044% per day. This percentage may seem small to you at the beginning, but it really adds up over one month or year subject to your balance. After you know what your periodic interest rate is, you must figure out your average daily balance.
Still paying attention?
Suppose that you have Rs. 2,000 balance on your credit card when the month begins and you do not pay this amount for the initial 15 days of the month. But, then you pay off Rs.500 on 16th day of the month and another Rs. 500 on 25th day of the month. This means that your average daily balance will be (Rs.2,000 x 15 + Rs.1,500 x 9 + Rs.1,000 x 6) / 30 = Rs.1,650.
This is your daily average balance. Now, you can put this together with your periodic interest rate in order to calculate your monthly interest charge. This means that your monthly interest charge will be Rs.1,650 x 0.044% x 30 = Rs.21.78.
So, this is how your credit card company will calculate your APR. By knowing this, you can become more empowered and will be encouraged to pay off your entire balance every month.
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