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explain APR
18 Jul 2019

Explain APR With These 5 Simple Definitions

A 2017 survey revealed that many millennials don’t understand how credit cards work. Even if you aren’t a millennial, you may relate to this. There is so much jargon surrounding credit cards and so many types of credit cards available, it’s easy to find yourself confused.

One of the most common terms associated with credit cards is APR, and it’s a term that every credit card holder should know. There are several ways to define APR, and we’re going to break down five common ways to explain APR to help you understand this important term. Read on to learn about APR and how it affects your credit card experience.

1. The Definition of APR

One of the most common credit card questions is, “What does APR stand for?” It stands for annual percentage rate and it is your interest rate stated as a yearly rate.  The truth in lending act requires lenders (and credit card issuers) to disclose the total fees paid on an annual basis for the loan or credit card they offer. This is what’s shown in that standard table, known as the Schumer Box, on every credit card or loan agreement.

2. An Explanation of APR vs. Interest Rate

Because the two terms are so often confused with one another, it can help to know the difference between APR and interest rate. The interest rate is the percentage of your borrowed money – your credit card balance – that you must also pay along with the borrowed amount. For loans such as installment loans, APR includes additional fees like closing costs and origination fees. However, with credit cards, all of these fees are situational (you only get a late fee if you don’t pay the amount due on time). So for credit cards, the APR shown is the same as the interest rates. Easy, right?

3. Defining APR in Relation to Daily Periodic Date

APR also relates to another credit card rate, called DPR, or daily periodic rate. Most credit card issuers divide the APR by 365 and then use this number -the DPR – to calculate how much you’ll pay in interest each month. They multiply the DPR by how much you owe to find your daily interest and then add the sum of the daily interest at the end of the billing cycle.

4. Fixed APR vs. Variable APR

Fixed and variable are the two types of APR you may encounter. With a fixed APR, you pay the same rate throughout your entire borrowing term. With a variable APR, though, the card issuer can change the rate, usually based on the U.S. federal prime rate.

5. Other Types of Credit Card APR Offers

You may encounter promotional APR offers, which are rates offered for a short period of time. There are also special APR options for balance transfers, which is often a 0% or very low rate on balances that you transfer over. Beware of penalty APRs, which are higher rates your card issuer can charge over issues like late payments and spending over your credit limit.

Beyond APR – Learn How to Find the Best Credit Card for You

Now that you understand how to explain APR and how it affects your credit card experience, you may want to find a new, better credit card for your needs. Luckily, you’re in the right place for that. Browse our blog information about the best store credit cards, the best cards for teens, and more.

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