Key information every cardholder should know
Even if math isn’t your favorite subject, the Annual Percentage Rate (APR) for your credit card is a number you should be familiar with. The APR describes the cost of your credit as an annual rate. And fortunately, it isn’t difficult to understand some useful facts about the different APRs that can apply to your credit card account.
Different types of transactions, different APRs.
It's not unusual to have one APR for purchases and another for bank cash advances. Issuers may also encourage card usage by offering promotional APRs that give you a lower APR on certain types of transactions for a set period of time. When the time is up, the APR goes back to the original level. Used wisely, these low promotional rates can save you money.
One type of APR to avoid is the penalty APR. These higher APRs are often imposed if you pay late. Your account agreement will have details.
Variable vs. Non-Variable APRs.
Any of your APRs may be either variable or non-variable:
- A variable APR is calculated by adding a set number (called the margin), which is determined by the issuer, to a reference rate (called the index) such as the U.S. Prime Rate. When the Prime Rate goes up or down, your variable APR may change, depending on whether your issuer updates your rates monthly or quarterly. Your account agreement will tell you how often this might happen.
- A non-variable APR is not determined by a reference rate, and so is more stable than a variable APR. However, a non-variable APR is not guaranteed. Most issuers reserve the right to change even a non-variable APR based on market conditions or other reasons, but they are required to notify you first.
Managing Credit Tip #6
Having trouble making your credit card payments? Your issuers may be able to help. Contact them immediately to discuss your options.
How your monthly interest charge is calculated.
Since most credit card statements are calculated monthly, and months vary in length, most issuers use a Daily Periodic Rate (DPR) to calculate interest charges. The DPR is calculated by dividing the APR by 365, the number of days in a year. That number is multiplied by the account balance and by the number of days in the statement billing cycle, as shown on your statement:
Balance x DPR x days in statement billing cycle = interest for that month’s statement.
Computing the balance:
Because your balance may vary from day to day, issuers use different methods to determine the balance that is subject to interest charges. The method your issuer uses should be described on the back of your statement. Two of the most common methods are average daily balance and adjusted balance. Your issuer will compute separate balances for transactions with different APRs.
How payments are applied to your balance.
If you have balances with different rates, credit card issuers are required to apply any amount you pay above your total minimum payment toward balances with higher rates, but they are permitted to apply your total minimum payment to the balance with the lowest rate first. Check your account agreement to see how your credit card issuer allocates minimum payments.
Take action now.
Understanding your APRs can help improve your financial decisions. You could save by assessing your current rates, comparing rates for new offers, and avoiding actions that might trigger a penalty rate. You can also save by holding off making higher-rate transactions until you pay off balances that have the lower promotional rate. Understanding this critical feature of your account can help you in the long run.
What's next? Taking control of your budget