What Is APR?

APR stands for the annual percentage rate a credit card company charges their customers. The average credit card has a 15% APR meaning you will pay fifteen dollars in interest for every 100 dollars you spend yearly. Fifteen dollars does not sound like much for a credit card company to take in, but remember that many consumers spend 5,000 dollars or more on their credit cards each year, at 15% that is 750+ in interest coming back to the credit card company. It is also important to remember that credit card companies have a myriad of fees that can also add up very quickly.

Now that we know exactly what the APR a credit card charges stands for it is just as important to know exactly what APR a credit card company will charge. Many credit card companies advertise “low APR cards” with rates in the single digits! This can be very tempting, but remember that introductory rates do not last forever. Read the fine print before you ever apply for any card. It is common for credit card companies to charge 9.9% for 90 days before upping the APR to 15 or even 20%! Also many credit card companies raise the APR of a card significantly if you fail to make a monthly payment on time, even if it is just a day late this can be an excuse for credit card companies to raise interest rates tremendously. Credit card companies get a bad rap for the practices I listed above, remember that credit card companies are no different than companies in different industries; they are trying to make as much money as they possibly can. It is up to you to protect yourself against these practices!

Visa, American Express, MasterCard and other credit card companies do not make much money from someone making a purchase and paying it off within a few months. Credit card companies make most of their “dough” when their cardholders make the minimum monthly payments, either 2 or 4% of their balance each month. When such small payments are made monthly you make a negligible effect on the actual balance you have on your card. As Albert Einstein once said: “The most powerful force in the universe is compound interest”. In finance you can either have compound interest working for you or against you, by making low monthly payments on your credit card balance you are letting the credit card companies get the upper hand. The 15% interest on your balance will add up very quickly and before you know it your interest will be getting interest on your interest [if that makes any sense].

If you have a card with a 15% APR and a 1,000 dollar balance you will owe $1,150 [$150 extra in interest] a year from now if you do not make any payments towards your balance. A year after that you will owe $1322 [$172 extra in interest] assuming no payments are made. This nasty cycle will not come to a stop until the credit card holder begins to take his or her balance seriously and pays off as much money towards the card as they can. This example should show you that the best way to pay less interest to credit card companies is to pay off your balance quickly. Also the example was done in an almost “best case scenario” with no interest hikes on your credit card balance or fees which are bound to occur over years of having a credit card. While the APR you pay on a credit card certainly matters, it means nothing if you do not have the discipline to only buy things that you can afford to pay off within a matter of months. Credit cards can be valuable financial instruments if you know how to use them wisely, if not they will help you spiral downward into a pit of debt and financial helplessness.

To recap, APR is the amount of interest you will pay on your balance over the course of a year. Since interest is charged compoundly, meaning interest is charged on interest it is of utmost importance to pay off your balance as quickly as you can. It is better to go with a high interest card that you make payments on quickly than a low interest card that you almost “ignore” your balance. Credit card companies are looking out for themselves first and foremost, you will not hear this type of advice anywhere else.