Doing the numbers on APR
APR stands for Annual Percentage Rate of charge. The APR of a credit card determines how much you have to pay each month. Put simply, the APR of a credit card is the monthly interest charge multiplied by twelve months. A simple example of this would be a credit card with an APR of 10.2%. Divided by 12, this would mean that the interest would be 0.85% of your outstanding balance that month. Therefore, monthly interest on a balance of 1000 with 10.2% APR would equal 8.50. The total amount of interest you pay over the year will depend on your outstanding balance and how much you pay off each month. It means that when choosing a credit card, you can use its APR to compare with different cards, but the annual amount of interest you will pay depends on your monthly repayments and balance.
APR takes into account a number of different factors, all of which combine to give you the final figure. This includes the interest rate you have to pay as set by the lender, the length of time it takes you to pay off the credit card loan and the frequency and timing of your instalment payments. It can also take into account additional fees that the lender may impose on the loan agreement, such as payment protection insurance. All lenders are required to give full disclosure of their APR charges and, as the rate has a direct bearing on the cost of your credit card loan, it pays to shop around before you sign any agreement.
Once an attractive APR has caught your attention, the questions don't stop there. First and foremost - is the APR fixed or variable? If the rate is variable, what may seem like an attractive offer could have a price once the 0% honeymoon period is over. Market forces (such as the Bank of England's base rate) heavily influence a variable rate and these forces can change dramatically. The consequences could be that you go from zero to hero-sized interest payments very quickly, pushing the cost of the credit card loan up considerably. If you're lucky the payments could go down. This random variable is what card companies are trying to avoid, so even flexible APR rates don't change that much. You'll only really feel the impact at the end of a 0% offer. With a fixed rate your interest charges stay the same regardless of market fluctuations.
The next question to ask is if there are any additional charges that are not included in the APR. This could include charges for services such as optional payment protection insurance. If additional charges are included, make sure you understand what they are, ask yourself whether you really need the services offered and how much and when you would have to pay. At this point, it is wise to ask yourself if you can afford the monthly payments. A more expensive loan with a higher APR could have lower monthly repayments if they are spread out over a longer period of time. This might suit those on a tighter budget, but it is sensible to calculate how much extra you would be paying in the long run.
Finance and lending is a complex area, and APR is no exception. The Government and financial regulatory bodies recognise this, and have put safeguards in place to protect consumers to make sure that all lenders comply with basic guidelines. The lenders, in return, are happy to comply with this stipulation, as it shows the public that the credit card companies are open and accountable. The APR attempts to create a single figure of interest on a loan amount, so that consumers can compare companies offering the same amount. The loan amount doesn't change - the APR is the variable in the equation. By shopping around, consumers can find the best deal with the lowest overall APR. The same applies to credit cards. Many cards offer 0% introductory periods and then either a fixed or variable amount of APR once the introductory period has expired. The trick here is to look past the initial incentive of 0% and calculate what the later APR rate will mean to your repayments.
Without taking into account APR, it is impossible to make an informed decision on which credit card deal is the best. The bells and whistles cards look tempting, but are designed with a specific type of customer in mind. If you don't fit the profile exactly, keep shopping around. To get the best deal, consumers need to be flexible and to take a little time studying the marketplace. That way they can avoid high APR rates that lay in wait for the unwary.
APR takes into account a number of different factors, all of which combine to give you the final figure. This includes the interest rate you have to pay as set by the lender, the length of time it takes you to pay off the credit card loan and the frequency and timing of your instalment payments. It can also take into account additional fees that the lender may impose on the loan agreement, such as payment protection insurance. All lenders are required to give full disclosure of their APR charges and, as the rate has a direct bearing on the cost of your credit card loan, it pays to shop around before you sign any agreement.
Once an attractive APR has caught your attention, the questions don't stop there. First and foremost - is the APR fixed or variable? If the rate is variable, what may seem like an attractive offer could have a price once the 0% honeymoon period is over. Market forces (such as the Bank of England's base rate) heavily influence a variable rate and these forces can change dramatically. The consequences could be that you go from zero to hero-sized interest payments very quickly, pushing the cost of the credit card loan up considerably. If you're lucky the payments could go down. This random variable is what card companies are trying to avoid, so even flexible APR rates don't change that much. You'll only really feel the impact at the end of a 0% offer. With a fixed rate your interest charges stay the same regardless of market fluctuations.
The next question to ask is if there are any additional charges that are not included in the APR. This could include charges for services such as optional payment protection insurance. If additional charges are included, make sure you understand what they are, ask yourself whether you really need the services offered and how much and when you would have to pay. At this point, it is wise to ask yourself if you can afford the monthly payments. A more expensive loan with a higher APR could have lower monthly repayments if they are spread out over a longer period of time. This might suit those on a tighter budget, but it is sensible to calculate how much extra you would be paying in the long run.
Finance and lending is a complex area, and APR is no exception. The Government and financial regulatory bodies recognise this, and have put safeguards in place to protect consumers to make sure that all lenders comply with basic guidelines. The lenders, in return, are happy to comply with this stipulation, as it shows the public that the credit card companies are open and accountable. The APR attempts to create a single figure of interest on a loan amount, so that consumers can compare companies offering the same amount. The loan amount doesn't change - the APR is the variable in the equation. By shopping around, consumers can find the best deal with the lowest overall APR. The same applies to credit cards. Many cards offer 0% introductory periods and then either a fixed or variable amount of APR once the introductory period has expired. The trick here is to look past the initial incentive of 0% and calculate what the later APR rate will mean to your repayments.
Without taking into account APR, it is impossible to make an informed decision on which credit card deal is the best. The bells and whistles cards look tempting, but are designed with a specific type of customer in mind. If you don't fit the profile exactly, keep shopping around. To get the best deal, consumers need to be flexible and to take a little time studying the marketplace. That way they can avoid high APR rates that lay in wait for the unwary.
About the Author:
Jo Smart writes for various popular websites and is an expert at explaining financial topics. You can find out more about Low APR Credit Cards and other Credit Cards here.
posted by Credit Counseling at
8:12 AM
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