Lenders calculate the annual percentage rate (APR) to determine how much it will cost you when they lend you money for a credit card or other type of loan. It accounts for yearly interest and additional fees reported as a portion of your principal loan total. When you want to shop for deals from various financial institutions, you want to compare APRs.
APR is often used synonymously with interest rate, but they aren’t the same. When APR is figured, it accounts for the interest rate and other expenses such as mortgage points. Also, it doesn’t take compound interest into account. If you want to determine that, you need to assess the APY.
APR changes depending on your credit score, loan term, and more. Your credit plays a big part in which APR you receive. If you have a positive credit score, you are more likely to get a reduced rate. That’s because good credit shows lenders you are a low risk and that they can rely on you to repay your loans.
For this reason, you should check your credit report at least once a year, particularly if you know you will need to take out a loan. Knowing your score will help you understand if you are getting the best interest rate or if the lender is charging you more than they should. When banks promote a specific APR, it is usually only for customers with a score of 740 or greater.
APRs for Mortgages And Other Loans
When you borrow money from a financial institution for a car, house, or anything else, the lender will levy multiple charges. You pay a few of these when you first receive the loan, but some are combined with your APR. These charges can include:
- Private mortgage insurance (PMI)
- Origination fees
- Mortgage broker fees
- Discount points
Credit Card APR
Credit cards come with a variety of APR fees. While you may not encounter all of them, understanding what they are is in your best interest. That way, you can anticipate whether or not you will have to pay them. Typical credit card APRs include:
- Purchase APR: This is the interest rate that accumulates when you make purchases with your credit card. Fees typically aren’t counted in the purchase APR since the credit card issuer won’t charge you just for using your card. This can be fixed or variable, which means the rate is based on the federal government’s current prime interest rate.
- Introductory APR: This is the APR offered as a welcome bonus to new cardholders. The initial APR is only a short-term offer and usually ends after six to 18 months. When it expires, you will have to pay the standard rate for purchase APR.
- Cash Advance APR: This is put on any cash you take that comes from your line of credit. Cash advance APR is often higher than other rates and typically comes with more fees you must pay when you get your monthly statement.
- Balance Transfer APR: When you transfer your current credit card balance to a new one, you must pay the balance transfer APR. Like cash advance APR, this rate is also more than purchase APR, but you may see a lower fee during the introductory period depending on the card. You will also have to pay extra fees on top of the balance transfer APR.
- Penalty APR: You must pay a penalty APR if you don’t pay your credit card bill on time, your payment bounces, or you went over your line of credit. Under the CARD Act passed in 2009, the issuer must lower the penalty APR if you make timely payments for six months, although they can implement a higher APR on new fees.
Howard Dvorkin, a CPA and Debt.com chairman, told Money.com that if you don’t want to pay any APRs, “Don’t run a balance.”
“I’m being straight up,” he added Dvorkin. “The only person you’re hurting is yourself by running a balance, and the only people you’re enriching are at the bank.”
But if that’s out of the question for you, or you are currently dealing with credit card debt, there are several strategies at your disposal. Dvorkin suggests, “Try transferring your debt… to a credit card that has a deal where you can transfer the balance [for a low APR]… and always try to triple the minimum payments.”
- Paris, Mayra. “What Is an APR?” Money, 13 Oct. 2020, money.com/what-is-an-apr/.