All You Need to Know About APR in Credit Cards: Key Terms and Facts

If you are new to credit cards, you need to be aware of the various common terms and definitions that credit card companies use. Terms like APR and interest rates are difficult to understand or confusing when you use a credit card. You have to understand them properly if you want to manage your finances well.

For instance, if you are using specialised credit cards such as travel or fuel credit cards, it’s essential to comprehend how APR in credit cards works. These learnings can help you save money in the long run.

Here’s a brief analysis of the terms and definitions related to APR in credit cards.

Types of APR

Annual Percentage Rate	Interest you pay each year on the credit card balance Applies to any balance that you carry over from one month to the next	For example, if your APR is 26% and you owe ₹20,000, you could end up paying ₹5,200 in interest.
Purchase APR	Interest rate applicable on the purchases you make using your card Pay off your balance in full each month to avoid this interest	Everyday expenses like groceries, clothing, or dining out come under purchase APR
Cash Advance APR	Is an expensive way to borrow money because of the high APRs Making cash withdrawals is only recommended during emergencies Starts immediately and grace period doesn’t apply	When you make ATM withdrawals with a credit card, you need to pay interest on the amount, called the Cash Advance APR
Balance Transfer APR	Involves moving outstanding debt from one credit card to another, usually to a new issuer Usually lower in the initial period or during the promotional offer Increases after this period ends, so watch out!	Applied when you transfer your debt to a credit card – usually with a lower interest rate
Penalty APR	Accumulates when you miss a payment Try not to miss any date of payment as the APR accumulated is very high It can make carrying a balance even more expensive.	Applied to late payments

Calculating APR

In simple words, calculating it is about taking the periodic interest rate and multiplying it by the number of periods in a year.

Daily Periodic Rate Calculation	Divide the APR by the number of days in a year for a daily periodic rate	For example, if the APR is 26%, the daily periodic rate would be 26% / 365 = 0.0007124% approximately
Monthly Periodic Rate Calculation	Divide the APR by the number of months in a year	For example, if the APR is 26%, the monthly periodic rate would be 26% / 12 = 0.021%.
Total Interest		If your card uses the daily periodic rate with a balance of ₹20,000 and a daily periodic rate of 0.07124%, the daily interest would be ₹20,000 x 0.0007124 = ₹14.248
Annual Interest	Calculated based on the daily or monthly interest accumulating over the year	Total annual interest divided by the average balance gives you the effective APR

Tips for Managing Your APR

From the above analysis, it is clear that APR can be high or low, depending on your card and usage. Some tips you can follow to manage the APR are:

Pay Off Your Balance in Full: It is best to clear your monthly balance in full to avoid any kind of interest and keep your overall borrowing cost low.
Get a Low APR Card: Lower APR credit cards or balance transfer credit cards are some of the best solutions to manage your purchases.
Take Advantage of Promotional APRs: Some issuers offer 0% APR for a limited time. It can be beneficial if you want to consolidate debt.
Avoid Cash Advances: Some of the highest interest rates occur when you opt for cash advances. Therefore, you should avoid using this unless it is an emergency.

Credit cards provide you with many benefits and rewards but understanding your annual percentage rate is crucial for managing your credit card. Otherwise, the rewards and cashback will go to waste! By keeping track of your APR and paying off your balance regularly, you can enjoy the rewards of a credit card seamlessly.

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