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 you have found an attractive APR rate that suits your purpose, there are a couple of extra questions to ask the lender before signing. The first is whether the APR is fixed or variable. If it's variable, what may seem like a tempting offer to begin with could have a nasty sting in its tail as the interest charges can go up as well as down. A variable rate is subject to influence from the Bank of England's base rate and other market forces, meaning some credit card interest rates can change from one month to the next. This can be a good thing in a buoyant economic market, but could cost you more if the economy takes a dive. With a fixed rate the payments stay the same, regardless of outside market influences, but can be higher overall, depending on the of length time taken to pay back the loan.
The second question should be to ask for more detail about any additional charges that are not included in the APR. This brings us into payment protection insurance territory. With some cards, this service is an optional extra, but others insist on its inclusion. It can act as a safeguard should your circumstances change, but if it's something you're willing to forgo then look for cards that offer it as an option, rather than as a non-negotiable inclusion. This is a good time to also ask yourself if you could afford the maximum monthly repayment charges without stretching yourself financially to the limit. If the credit card loan is spread out over a longer period of time, the payments may be lower, but the calculated cost of the overall loan may be higher, as you are paying interest for longer.
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 examining all the facts and figures, it is impossible to make an informed decision as to which credit card offer is right for you. APR offers consumers a flashlight to light their way along the dark paths of personal finance and credit card agreements. By spending a little time looking at all the offers a good deal can be found that ticks all the boxes whilst avoiding hefty charges. Don't just be drawn in by the lure of the glitzy 0% boys - more long-term options may seem dull in comparison at first, but could be kinder on your bank balance in the long run.
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 you have found an attractive APR rate that suits your purpose, there are a couple of extra questions to ask the lender before signing. The first is whether the APR is fixed or variable. If it's variable, what may seem like a tempting offer to begin with could have a nasty sting in its tail as the interest charges can go up as well as down. A variable rate is subject to influence from the Bank of England's base rate and other market forces, meaning some credit card interest rates can change from one month to the next. This can be a good thing in a buoyant economic market, but could cost you more if the economy takes a dive. With a fixed rate the payments stay the same, regardless of outside market influences, but can be higher overall, depending on the of length time taken to pay back the loan.
The second question should be to ask for more detail about any additional charges that are not included in the APR. This brings us into payment protection insurance territory. With some cards, this service is an optional extra, but others insist on its inclusion. It can act as a safeguard should your circumstances change, but if it's something you're willing to forgo then look for cards that offer it as an option, rather than as a non-negotiable inclusion. This is a good time to also ask yourself if you could afford the maximum monthly repayment charges without stretching yourself financially to the limit. If the credit card loan is spread out over a longer period of time, the payments may be lower, but the calculated cost of the overall loan may be higher, as you are paying interest for longer.
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 examining all the facts and figures, it is impossible to make an informed decision as to which credit card offer is right for you. APR offers consumers a flashlight to light their way along the dark paths of personal finance and credit card agreements. By spending a little time looking at all the offers a good deal can be found that ticks all the boxes whilst avoiding hefty charges. Don't just be drawn in by the lure of the glitzy 0% boys - more long-term options may seem dull in comparison at first, but could be kinder on your bank balance in the long run.
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 Debt Consolidation Loan at
8:24 AM
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