You might find the acronym confusing, but the APR (annual percentage rate) on your credit card or your mortgage should be a number you are familiar with. It's important because it describes the cost of your credit balance on a yearly basis. A healthy understanding of what determines this rate can help improve your financial decisions. You can save by assessing your current rates against competing cards or new offers, creating responsible spending and payment plans, and avoiding actions that might trigger a higher rate.
It's important for you to understand your annual percentage rate when managing your credit. You want to be sure you know just how much you are paying each month on your loan. Being knowledgeable about the factors that affect your APR will save you money in the long run.
Here are some tips to educate yourself about interest rates:
1. Read the account agreement. If you are already using a credit card or comparing different credit card offers, pay attention to the details. Make sure you know how much you are paying in interest and how it is calculated. Some cards calculate APRs while others do periodic rates (a monthly finance charge or daily charge). But some cards vary these interest rates based on your use of the card, such as 14 percent APR for purchases, but a 15 percent APR for cash advances.
2. Variable APR versus fixed APR. The account agreement tells you if your card has a variable or fixed APR. Variable means that the interest rate can fluctuate up or down from the set amount-called the margin-based on a reference rate like the U.S. Prime Rate (level charged by most banks to their most creditworthy customers). For example, when the U.S. Prime rate increases, your variable APR can also increase. Fixed APR rates don't fluctuate in this way, but they are not guaranteed-they can be changed based on market conditions. The good news with a fixed rate is that you will be notified first.
3. Higher or lower APRs. Which works best for you? It might always seem that having a lower APR is better, but not if you are a person who pays your balance off every month. If that's the case, then you should be more interested in other fees that might apply to you-like cash advances or annual fees-because the APR doesn't affect you.
4. Calculate how much interest you pay. If you maintain a balance every month, take a moment to look at how much you are paying in interest. The statement should tell you, but you can figure it out for a specific day. Your DPR (daily periodic rate) is calculated by dividing the APR by 365 (the number of days in a year). That number is multiplied by the account balance that day and by the number of days in the statement billing cycle, as shown on your statement. This figure might be a wake up call, because what you pay in interest could be extra money in your pocket.
Remember: Almost everyone reaches a point where they need a loan-whether for a mortgage or a start up business. Stay in control of your credit and you will be able to secure a loan with a more favorable interest rate, thus enjoying the benefits that good credit management offers.
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