The Importance of Understanding the Annual Percentage Rate of Your Credit Card

The most important aspect of your new credit card is usually well hidden in the fine print. The annual percentage rate, or APR, is the amount of interest you've agreed to pay the issuing bank should you hold a balance on your credit card. APR can fall anywhere between 8% and 30% and is often dependent on your credit score, the way you use your credit card, and your payment history

Understanding APR

If you read through the small print on the paperwork that comes with your new credit card, you'll soon discover how credit card companies make their money. Not only are there fees for going over your limit or sending payments late, you also pay the bank a hefty sum to hold a balance on your credit card. Unlike car loans, credit cards calculate interest every month on that month's balance, so you pay considerably more to buy down a credit card balance than you would another sort of loan.

Be Wary of APR

The higher the APR on a credit card, the more expensive it will be to keep a balance on the card and the higher your minimum payments will be. If you pay your balance in full every month, the actual APR on the card is irrelevant since no interest will ever be charged, but shopping for the card with the lowest interest rate is always wise as you never know when the unexpected will occur.

Even if you find a card with a low APR, you must still read the fine print to see how long you're able to keep that APR. Credit card companies reserve the right to raise Annual Percentage Rates if you miss a payment or even if a payment is late. They also can raise interest rates if you approach the limit on your balance or over time to reflect market conditions. In cases of introductory APRs, the low APR is only good for a few months to a year depending on what the actual offer entails.

Choose Wisely

When shopping for and applying for a new credit card, make your selection wisely. Understand that APR changes with your credit score, your past payment history and the type of credit card you're seeking. Rewards credit cards might have a higher APR, for example, to compensate the issuing bank for the offered reward. Read the find print and make a selection based on what is best for your individual situation.