APR – What’s That Mean, Anyway?
Welcome to What’s That Mean, Anyway? — our column explaining financial terms and concepts in a way you can actually understand.
Seems odd, right? A financial company explaining financial terms in a way you can actually understand. Finance is filled with so much jargon it’s like trying to jump into a conversation without knowing the language.
Today’s topic is a staple of credit card confusion — APR.
What Does APR Stand For?
APR stands for Annual Percentage Rate. It represents the total amount of interest charged on your credit card balance over the course of one year.
That sounds just like an interest rate. What makes APR different?
Good question, smart and attractive reader. The difference is this:
- APR represents what you’ll pay over a full year.
- Interest rate represents what you’ll pay on your balances monthly.
START OF MATH > Say you have a credit card that charges no fees and has an interest rate of 1% per month. That card’s APR would be 12% because 1% x 12 months = 12%. < END OF MATH
That makes sense, but then why have two different numbers?
APR takes into account your monthly interest rate and anything extra your credit card charges, like processing fees or membership fees.
Ok, so it’s there to give me a fuller picture of what my credit card costs?
Exactly. APR has been required since The Truth and Lending Act. As of 1968, any lender — credit card company or otherwise — is required to show you an honest representation of what your loan will cost before you accept it for two main reasons:
- APR makes it easy for you to compare loans against each other.
- APR gives you visibility that you might not have otherwise into the lending practices of the people giving you a loan.
That’s great. Who doesn’t love honesty and visibility?
No one we can think of. But just because you now understand the APR basics doesn’t mean it doesn’t get more complicated.
Aww man, of course, it doesn’t.
Yeah. As with anything money-related, you need to do your due diligence before signing on the dotted line. Like knowing that your credit card can have multiple APRs.
- APR for Purchases
- The most common APR is the one that’s charged on anything you purchase on your credit card.
- APR for Cash Advances
- Need some cash fast? You can borrow from your credit card, but expect the APR to be much higher than what you’re used to.
- APR for Penalties
- If you start breaking the rules you agreed to with your credit card company, like not making payments, your APR will change and not in a good way.
- Introductory/Promotional APRs
- The trickiest of all APRs. These only last for a set amount of time. Then the APR of your card will jump and jump high. Think 0% APR for a balance transfer for the first 6 months, then 24% APR after.
That’s a lot to watch out for.
No argument here.
So if I’m understanding you right, APR represents how much carrying a balance/using my credit card will truly cost me over one year.
Also, know that if you pay off your credit card every month, your APR doesn’t matter. Well, until that one month when you have to carry a balance. Then you’ll be happy you did your research.
Thanks. So that’s what that means.