Understanding Annual Percentage Rate (APR)

The annual percentage rate may seem like calculus to many people. It's some arcane and difficult to understand system created to help credit card companies in knowing how much money they will charge you each month for interest. The problem is-that makes the annual percentage rate, or APR, really important if you use your credit card. So at the same time it is as important for you to have some knowledge, even if just basic, of how the annual percentage rate is calculated.

In order to understand how to calculate apr, the first thing would be to get the definition of the annual percentage rate.  It is in fact pretty simple if you see the APR from this way.  By definition, the annual percentage rate is the yearly rate of interest that the credit card charges you, including any fees and costs paid to obtain that loan.  The credit card companies figure out this loan in a very straightforward way, believe it or not.  They take the average compound interest rate of the term of your loan.  This way, you would be able to compare one credit card debt, or loan, to another. 

The annual percentage rate for a credit card company, in this respect, is simply the same as the annual percentage rate for a mortgage, for instance.  However, with a mortgage the details are different.  For example, with a mortgage, the APR includes the interest rate of a mortgage taking into mind not just the interest, but the mortgage insurance, and certain closing costs and even points paid at the time of closing. 

Credit card companies, like mortgage companies and other lenders, are required by law to always tell you what your annual percentage rate is.  That way, when you're shopping for credit cards, you can compare them by the annual percentage rates.  If you’re planning to transfer credit card debt from one card to another, you can then understand practically how much you will be saving month to month, credit card to credit card. 

With credit cards, definitely, there are even more things to consider when comparing one to another.  In addition to the annual percentage rate, you should look at a credit card payment schedule-how much grace period do they offer you to pay off a purchase, and what's the penalty if you fail to make a payment promptly, or miss one altogether?  Another thing you might want to take into account is each credit card rewards programs.  Determine the ratio between purchases and reward points, or cash back?  Is it 1 point for $1?  Do you get 1 percent cash back, or 5 percent?  All of these factors, as well as the annual percentage rate, should be taken into consideration.