What Makes Up an APR?

An annual percentage rate (APR) is a periodic interest rate that determines the finance charges you pay on your account if you carry a balance. Some card companies charge different APRs depending on the transaction. For example, your rate for cash advances may be higher than your rate for balance transfers. Card companies may increase your interest rate if you miss a payment deadline.

Your interest rate will differ by card, but most credit cards are variable-rate which rise and fall according to a particular economic index, such as the U.S. prime rate.

Credit card APRs tend to be higher than some other types of loans because they are the primary source of revenue to cover a variety of items, such as:

  1. The bank’s cost of funds
  2. The risk/cost of bad debt and fraud
  3. Benefits such as interest-free grace periods and rewards
  4. Operational costs for servicing high transaction/low average loan accounts
  5. The bank’s profit requirements

There are a number of reasons why your APR might increase. Some examples include:

  • You are late making a payment, or you miss a payment altogether
  • Your low introductory APR has expired
  • Your credit history has changed and has affected your credit score

It is important to note that the new Credit Card Accountability Responsibility and Disclosure (CARD) Act has significantly changed the disclosures card companies must provide regarding the terms of your account and limits certain credit card practices such as the ability of card companies to increase rates on existing balances. Now, cardmembers must be notified, in writing, at least 45 days before a significant account change, such as rate or fee increases.

For more information on how your APR is determined, call your credit card company’s toll-free number.

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