It seems like the only APR references consumers actually pay attention to are the ones involving 0%, right? While APR is the essence of all things finance-related, those three little letters stand for so much more than just annual percentage rate. Understanding the impact and the ramifications of your APR’s on your mortgages, car loans and credit cards is absolutely critical to personal financial success.
What Impact Do APR’s Have?
The ongoing APR on your credit cards is the amount of interest rate you’ll pay on the total balance you carry over after the billing cycle ends. It seems, at first glance, a pretty easy calculation but in reality it’s not.
For instance, for any one credit card, there are typically a multitude of APR figures to consider. The first may be a promotion or ‘introductory’ rate that is applied on all purchases for a specific period of time, usually 6-12 months after you open the account. Once that introductory APR expires, a new APR will take effect which can be significantly higher than where you started. If you don’t account for the expiration of that introductory period, you can find yourself at a serious financial disadvantage.
Additionally, once a regular APR kicks in after the promotional period ends, varying APR’s may apply to the various transactions you make on the card. If you take a cash advance on your card through an ATM or by other means, you’ll incur an even higher rate of interest on that amount. You may be paying 12% interest on that outstanding balance for regular purchases made but that $250 you took out in cash miht cost you an APR of 24% or higher.
More APR figures to consider are those that are applied to balance transfer credit cards. These offers give customers the option to transfer existing credit card balances to one card with the incentive of a much lower APR, often times promoting extended 0% introductory offers. The key word here is introductory. The rate only lasts for a certain period of time and then the rate is increased once the offer is over. This means if you haven’t paid off in full all of the balances you transferred from other cards, you may end up paying way more in interest than if you hadn’t transferred the balances over. If you make those payments and eliminate the balance before the promotional period ends, a balance transfer card with a low APR just might be the perfect strategy for debt relief.
How Do You Know What’s Going On?
While new CARD Act requires credit card companies to provide consumers with clearer, more user-friendly agreement paperwork, the reality of APRs is still not always presented in the clearest way. You may have to look for what it costs for transactions outside of the normal interest rate. Look for the small type in your disclosure to see how much you really incur in interest rates.
The way a card issuer determines your APR on any given card is based primarily on your credit score. The providers figure that a riskier customer, one with less-than-perfect credit, may end up defaulting on their account so the card company is essentially charging additional risk premium in the form of higher APR’s. Higher credit scores get you lower APRs so it’s in your best interest to build and maintain a good score at all times.
How to Manage Your APR Strategy
Ideally, the best way to completely avoid snafus with credit card APRs is to pay off the entire balance each month before the billing period ends. This way you never have to worry about one penny in finance charges being assessed on your account.
Another strategy worth considering is asking your card issuer for an APR reduction. The only way you should even consider requesting an APR reduction you pay is by being an excellent customer with an outstanding track record of account maintenance and payments. The worst-case scenario with your request is that the card company will say no. The upside is if they agree, you may end up paying significantly less in interest on your outstanding balances than if you were to apply for a new credit card.
The most important thing to remember about APRs is that if you mess up your account by paying late consistently or missing a payment entirely is that your card issuer has the ability to raise your APR. Showing evidence of potentially risky consumption patterns, the card company can increase your APR the increased risk that you pose to cover any potential future losses.
If you have multiple cards, you should make a list of which account incurs which finances so you can prioritize the way you use and pay your cards.