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Understanding Credit Card Annual Percentage Rate (APR)
The word ‘APR’ stands for Annual Percentage Rate. Credit card APR means the yearly interest rate that you need to pay on your card balance. It includes both the interest charged by the card issuer and any additional charges associated with the card. Learning about APR will help you have a better understanding of the total borrowing cost.
Read on to know what APR is, how it works, its types, and proven tips to reduce APR on credit cards.
The formula for calculating credit card interest is:
Credit card interest = [daily rate of interest] X [total daily balance] X [total number of days in billing cycle]
APR is charged on your outstanding credit card bill in a billing cycle. It does not apply if you pay your dues in full every month. Read the following points to learn about the functioning of APR:
The first step in calculating the APR on your credit card is to check the rate of interest your card issuer charges for extending the credit facility.
Interest is typically calculated on a yearly basis but charged every month on the billing date. This interest applies to the balance you did not pay last month.
Additional charges that your credit card issuer may charge must be included while calculating the APR on your card.
If your card extends a grace period, no interest is charged upon full payment on EMIs during this time. Also, there is no APR calculation for the same period.
Cards with variable APRs often tie their rates to benchmark indices such as the prime rate. Consequently, as the index fluctuates, the card's APR can adjust accordingly.
Late payment or violations of the card agreement may result in the charge of a penalty APR, substantially higher than the standard APR.
Also Read: 6 Reasons Why Your Credit Card Application May Get Declined
The different types of APRs associated with credit cards are outlined below:
1. Introductory APR
A promotional interest rate or introductory APR, as low as 0%, is offered for a limited period when you open a new credit card account or transfer balances.
2. Penalty APR
Penalty APR is a higher rate of interest that is applied as a penalty for late payments or breaches of the credit card agreement.
3. Cash Advance APR
This interest rate applies when you withdraw cash from ATMs with your credit card. This often comes with additional fees and higher interest rates than purchase APR.
4. Purchase APR
Purchase APR is the rate of interest that is applied to the outstanding balances from purchases made with a credit card. It is the standard interest rate applied to daily purchases and expenses.
5. Balance Transfer APR
Balance transfer APR is the interest rate applicable to balances transferred from one credit card to another. This can help you reduce your cost of borrowing or consolidate debts.
Fixed APR is the interest rate that remains unchanged since you open a credit card account. Whereas variable APR indicates that your chargeable interest rate can increase or decrease over time.
APR can differ depending on various factors, such as a borrower’s creditworthiness, etc. For example, if you have a good or excellent credit score, your APR can range between 16% to 22%.
Here are 6 tips to help you reduce APR over time:
1. Review Credit Card Terms and Conditions
Go through the terms and conditions on your credit card to stay informed about any changes in APRs or promotional offers. You can avoid penalty charges by knowing the factors that affect your APR.
2. Negotiate with Your Credit Card Issuer
Contact your credit card issuer and inquire about the possibilities to lower the APR. Highlight your good payment history, loyalty as a customer, or competitive offers from other card issuers to negotiate a lower rate.
3. Consider Balance Transfer Offers
Looking for offers with promotional balance transfer APRs can be an excellent strategy to save on interest charges. However, you must be aware of any balance transfer fees and the standard APR once the promotional period ends.
4. Pay Off Your Credit Card Balance
To minimise interest charges, you must pay off your credit card balances within the due date of every billing cycle. Making larger payments or paying more than the minimum due can help reduce the overall interest paid over time.
5. Improve Credit Score
Maintaining a good credit score can increase your chances of qualifying for lower APR offers. Pay bills on time, keep credit card balances low, and avoid opening too many new accounts to demonstrate responsible credit management.
6. Switch to a Different Card
If you cannot use any of the above options, you can wait till you have repaid all your debts and apply for a new credit card. You can opt for low interest cards offering 0% introductory APR. Make sure you do not compromise on the rewards provided by the card.
Also Read: What is the Minimum CIBIL Score Required for a Credit Card?
Understanding the meaning of credit card APR is essential for managing finances effectively. It reflects the annual interest rate charged on card balances, including both interest and additional charges. By learning about different types of APRs and implementing strategies to reduce APR, you can apply for new credit facilities more confidently and save money on interest charges.
1. Is a 24% APR on a credit card considered high?
Yes, an APR of 24% is considered high. Try to improve your credit score by applying strategies such as paying on time and maintaining a credit utilisation ratio under 30%, to access attractive loan offers.
2. What is considered a good APR?
A credit card APR is ideally considered good when it is below the national average rate which currently is 20.40%.
3. What strategy can I apply to reduce the APR on my credit card?
To reduce the APR on your credit card, try to exercise the habit of making timely repayments and maintaining a healthy credit utilisation ratio. This will also help to improve your credit score.
We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.
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