Understanding APR

APR stands for the Annual Percentage Rate. It is a standardised way of stating the interest rate you will pay for credit. On credit cards it will apply to carried over balances, that is, balances you do not, or cannot pay this month. It also applies to cash advances and sometimes to balance transfers from other cards. The APR states the interest as a yearly rate.

Multiple APRs

Most credit cards will not have a single APR that applies to all transactions. They will have different interest rates depending on the transaction. For example, if you make a purchase with your card it may be charged at one rate, then you take out cash from a bank machine and it will be charged at another rate.

• Credit cards can charge different interest rates for purchases, cash advance, balances transfers and other types of transaction.
• Card issuers may also give you tiered APRS so that for example the first £500 of you balance may have one rate, the next £500 another rate and so on.
• There may be a penalty APR that will apply to your entire balance should you become late on payments.
• There may also be an introductory APR that applies for the first couple of months of the card.
• The APR that takes effect after the expiry of the introductory APR is termed the delayed APR.

If you are carrying over balances, these different APRs will have a great effect on your monthly interest charges. Also, you should be aware that card issuers generally do not allow you to choose which transactions you wish to pay off. They have a policy that older transactions are paid off first. While this generally makes sense it can become significant. For example, imagine in January you take advantage of a 0% balance transfer offer. Then in February you make a purchase at the purchase rate of for example 17%. When you make a payment on your card it will be against the 0% balance transfer as this is older. This means the 17% purchase will not be paid off until the entire balance transfer has been cleared.

Fixed APR versus variable APR

Some cards offer you a fixed rate of interest. With these cards, the interest doesn’t change, or at least doesn’t change often. If it does change the credit card company must inform you in writing before hand.

On the other hand, it is possible to have a credit card with a variable rate. With these the interest rate fluctuates from time to time according to a specified benchmark such as the Bank of England base rate. If the benchmark rate changes, your credit card rate will change accordingly.

If the card does use a fluctuating rate, examine the contract carefully to see how it changes.

Whenever you are taking out a credit card, it is important to know exactly how much you are being charged for it. A basic understanding of APRs is therefore essentiall.

You may also find the article Using APR To Compare Credit Cards useful reading.