To understand how much you’re going to pay in interest, you will need to understand how your card’s annual percentage rate (APR) works.
Below, you can find out how to calculate APR on a Credit Card.
What is APR?
APR is defined as the yearly interest rate charged on a credit card.
The APR on your credit card is the annual rate at which your card issuer will charge you interest whenever you carry a balance. The higher a credit card’s APR, the more interest you’ll pay.
If you always pay your bill in full and you never carry a balance, then APR and interest charges won’t affect you.
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Variable vs Fixed
There are two main types of APR that a credit card issuer might use. Some cards will have a variable APR and others will have a fixed-rate APR.
Variable rate credit cards have an interest rate that is tied to an index such as the U.S. prime rate. When the U.S. prime rate changes, the interest rate on those credit cards will change as well. A credit card with a variable APR may change monthly, quarterly or yearly.
The interest rates with a fixed-rate APR will not change with any index. Those rates can still change but your card issuer is required by law to give you plenty of notice before any change.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 requires credit card issuers to give 45-day advance notice of any interest rate increases.
How to Calculate APR?
There are several steps to follows when calculating APR:
- Calculate Your Daily Periodic Rate
- To calculate your credit card’s DPR, you need to divide your credit card’s APR by 365
- Issuers use this number to represent the number of days in a year
- Some issuers will use 360 instead of 365. You will need to check with your individual card to make sure you’re using the correct number
- Calculate Your Average Daily Balance
- To calculate this average you need to write down the balance that you owed at the end of each day of the billing cycle and then average all those numbers
- Calculate Your Interest Charges
- Multiply that DPR by your average daily balance and by the number of days in the month
Knowing how to calculate how much your credit card issuer will calculate interest charges on your credit card is important when understanding your finances.
Hopefully the above information helps you understand how to calculate APR on a Credit Card.