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The concept of an "annual percentage rate" is fairly simple. To calculate the monthly cost of your APR, simply divide your APR by 12 months. For example, if you have a relatively low credit card APR of 12%, simply divide 12% by 12: this will give you 1%. This means that with an APR of 12%, your monthly periodic rate is 1%.
Breaking it Down
To find out how much you owe at the end of the month, multiply the average daily balance on your credit card by your monthly period rate. This will give you your monthly finance charge. So, with a 12% APR you get a 1% monthly periodic rate. Let's say that the average daily balance on this credit card was $780 last month. $780 x 0.01 = $7.80. That means you'd owe your credit card company $7.80 in APR finance charges.
But a single credit card can have several different APRs:
APR for Purchases, Cash Advances and Balance Transfers
Depending on what you plan on doing with your credit card, you will need to calculate different APRs. For example, your credit card might have a premium APR of 12% for regular purchases. But that same credit card could have a 14% APR for cash advances. And let's say you want to transfer the balance from another card (with a higher APR!) to your card that allows you 12% APR on new purchases: your credit card could easily have a 17% APR for all balance transfers!
The Devil's in the Details!
Needless to say, it's important to read the fine print! Just because you have a low APR for daily credit card purchases, that doesn't mean you'll have premium interest rates for all transactions. If you're the type of credit card user who takes out cash advances regularly or intends to transfer balances from other cards, be sure to check for cash advance and balance transfer annual percentage rates before applying for a new credit card that's advertised as having a low APR. Chances are, the advertised low APR may only cover new purchases.
There's Never Just One APR!
When it comes to personal credit cards, there's never just one annual percentage rate. For regular purchases, balance transfers and cash advances, you can expect to pay different APRs. But you also need to be aware of status APRs, like introductory, tiered, delayed and penalty annual percentage rates. For more information on these types of APRs, click here.
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