Definitions

What Is APR (Annual Percentage Rate)? How Does It Work?

If you’ve recently determined that you cannot possibly afford your credit cards, there is a way to make sure you don’t pay full interest every month. You can set up a payment plan with your creditors to avoid paying the annual percentage rate or Cross-default APR for purchases and cash advances. There are other ways to avoid paying interest every month but these options carry a significant risk of forcing you into debt.

Avoiding Annual Percentage Rate or Cross-default APR For purchases and cash advances: When you make a purchase, your APR depends on your credit card company’s Annual Percentage Rate (APR). For purchases, you can choose to pay the full interest rate or choose to pay the minimum APR. If you pay the minimum APR by the date of your billing cycle ends, your credit card company will not charge you a penny on your purchases. However, if you choose to pay the full APR, your credit card company will charge you the full amount. For purchases where you pay in full, you still only pay the minimum APR.

If you choose to cancel your agreement without penalty, your APR will suddenly increase from your current APR once you begin payments in good standing again. Some credit cards offer a grace period of a few months where you only pay interest while your balance transfers to an account in good standing. Other penalties exist for late payments, so it’s important to read the agreement carefully. The terms and conditions may specify a minimum APR after which your APR will begin to increase annually.

Avoiding Cross- Default APR For balance transfers: Balance transfers to another credit card with a high annual percentage rate often have an extremely high annual percentage rate. Most credit card companies charge this amount even if you are not able to make payments. This means if you decide to transfer your balances to another account with a lower APR, your payments will be higher. As a result, you will be charged twice as much for the same purchases if you make cash advances.

To avoid being double charged for your APR for balance transfers, do your homework. Inquire about the average APR for balance transfers before you decide. If you are able to transfer your balances without penalty, look at the lowest APRs for the same purchases and then look at the APRs after your APR has been increased. You will likely find that the difference is less than five percent.

Not being aware of the daily and monthly minimums: If you are living in a state that does not require monthly filing of state taxes, chances are you don’t file your own personal federal tax return. You may think that you are being diligent by paying your quarterly estimated taxes, but the real score is how much you owe. The greater the amount of the unpaid annual percentage rate, the bigger the tax bill. Paying off the balance in full or paying the disputed amount in full will give you a good credit score.

Determining payment due and budgeting for future payments: Calculating your payments based on your balances and not basing them on a prime rate is dangerous. The most common mistake made is overburdening consumers with a large number of credit card balances and using the APR to calculate interest. Remember, that APR is a prime rate applied to a loan. Using the APR to determine your payments is risky because it will always be lower than the advertised prime rate. It is better to have a plan to pay off your balances and reduce your debt.

Finally, there is the temptation to use the credit to purchase APR as a reason to jump. The cardholder needs to resist this temptation. If the issuer gives you an offer to increase your APR, then it is wise to research the various offers available and compare the APR to other offers. If you are planning on changing credit card issuers, the best advice is to contact the cardholder’s current bank to find out if their new APR will be higher. You do not want to enter into a contract with a financial institution that will keep you paying a higher APR than what you can afford.

Akansha Reddy

Akansha is a technology enthusiast and a writer with an incredible following among the leaders and decision-maker of the industry. She writes about technology, billing software, regulations and much more.

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