How to calculate credit card APR
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Credit card Annual Percentage Rates (APRs) can be confusing for many cardholders. APR is the interest rate charged on outstanding card balances, and understanding how it is calculated can help you manage your finances better. This article will provide a comprehensive guide on how to calculate your credit card APR and some tips for managing your credit.
Understanding APR:
APR is short for Annual Percentage Rate, which is the total cost of borrowing expressed as an annual percentage. It includes not only the interest rate but also any other fees and charges that may be added by the lender. The APR allows borrowers to compare different credit cards and choose one that suits their financial needs best.
Different types of APR such as:
1. Purchase APR – The rate charged on general purchases.
2. Balance Transfer APR – The rate charged when transferring outstanding balances from one card to another.
3. Cash Advance APR – The rate charged when using a credit card to withdraw cash from an ATM.
4. Penalty APR – Higher rates applied when you default on payments or breach other credit agreement terms.
How to Calculate Credit Card APR:
1. Convert APR to Daily Periodic Rate (DPR):
To calculate your interest charges, most issuers use a daily periodic rate (DPR) derived from your annual percentage rate (APR). To convert your APR into DPR, follow these steps
DPR = (APR/ 100) / 365
For example, if your card has an APR of 20%, your DPR would be:
(20/100)/365 = 0.000548 or 0.0548%
2. Find the average daily balance:
The average daily balance method is widely used by credit card companies to determine interest charges. To find this balance, you must first add up all daily outstanding balances during a billing cycle and then divide it by the total number of days in that month.
For example, if your outstanding balance throughout a 30-day billing cycle is as follows:
– Days 1-10: $1,000
– Days 11-20: $1,200
– Days 21-30: $1,400
Your average daily balance would be ($10,000 + $12,000 + $14,000) / 30 = $1,200
3. Calculate interest charges for the billing cycle:
To calculate interest charges, simply multiply your average daily balance by the DPR and the number of days in the billing cycle.
Interest charges = Average daily balance x DPR x Number of days in the billing cycle
Using our example, the interest charges would be:
$1,200 x 0.000548 x 30 = $19.74
Conclusion:
Understanding and calculating your credit card APR is essential to manage your finances and make informed decisions about your spending habits. Remember that timely payments and reducing the outstanding balance will help you avoid high-interest charges. Additionally, shopping around for a credit card with competitive APR rates can significantly reduce your borrowing costs in the long run.