It’s important to read the terms and conditions when you’re deciding which credit card makes the most sense for your budget and your lifestyle. If you use credit responsibly, you could avoid paying hundreds, or even thousands of dollars in interest! So, familiarize yourself with this term while you shop around for a new card: APR
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What is an APR, Anyway?
When you buy something with a credit card, you’re basically borrowing money to pay for the item. If you don’t pay the full balance each month by the payment due date, you may be charged interest on purchases by the credit card issuer. When you apply for a credit card, the issuer will disclose to you the APR, or Annual Percentage Rate. That’s the interest rate you’ll pay if interest charges accrue according to the terms of your credit card agreement. The APR on credit cards can vary, the average being somewhere between 15% and 21% depending on the type of credit card you have. 1 While it’s called an annual rate, you’re actually charged interest each day your balance goes unpaid past the due date.
How Is My Annual Percentage Rate Determined?
You’re probably wondering why some cards offer you a lower APR than others. APR is based on a number of different factors, like the type of card and your credit score. Usually the lower your credit score, the higher the interest rate. Also, different APRs apply to different kinds of transactions. If you use your card for a cash advance, in some cases the APR on that transaction is higher than the APR on purchases because cash advances typically are considered riskier by the credit card issuer. How can you get a lower rate? Maintain a higher credit score by paying your bills in full and on time and and paying off debt. 2
What About All Those Introductory Offers I Get in the Mail?
Credit cards issuers may send you enticing introductory APR offers that, when carefully considered, can provide you with a low APR during the introductory period. The introductory APR could even be as low as 0%. Once the introductory period expires, you’ll be charged a standard APR rate, which is higher than the introductory APR. The introductory APR can be a great way to save on interest, but be sure to know when the rate is going to change and your introductory period ends, when the APR increases.
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What Happens if I Pay Late or Carry a Balance?
One smart thing you can do for your credit is to pay your bill in full and on time every month. Otherwise, you might incur late fees, see an increase in your APR, and you could even see an impact to your credit score. If you’re in the introductory rate period, your interest rate might revert to a penalty APR, which is a higher APR charged on that card when you do not fulfill your obligations under the terms of the credit card agreement. That would wipe away any of the benefits of that introductory APR.
What about if you carry a balance? The good news? Making on-time payments by the due date each month shows lenders you can stick to a repayment schedule. But a high credit card balance can negatively affect your credit score because it increases your credit utilization ratio. The most responsible way to build credit over time is to pay your cards in full each month by the payment due date.