The rough guide to APR
APR stands for Annual Percentage Rate of charge. The APR of a credit card determines how much you have to pay each month. Put simply, the APR of a credit card is the monthly interest charge multiplied by twelve months. A simple example of this would be a credit card with an APR of 10.2%. Divided by 12, this would mean that the interest would be 0.85% of your outstanding balance that month. Therefore, monthly interest on a balance of 1000 with 10.2% APR would equal 8.50. The total amount of interest you pay over the year will depend on your outstanding balance and how much you pay off each month. It means that when choosing a credit card, you can use its APR to compare with different cards, but the annual amount of interest you will pay depends on your monthly repayments and balance.
APR can be used to compare different credit and loan offers and includes such important factors as: The interest rate you have to pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments and amount of each payment, fees associated with the loan, premiums for payment protection insurance that the lender may choose to make compulsory All lenders have to tell you what their APR is before you sign any agreement, and as the APR has a direct bearing on the cost of your credit card loan, it pays to shop around before you decide on one particular card. There are plenty of very good offers available, if you're prepared to do your homework.
Once an attractive APR has caught your attention, the questions don't stop there. First and foremost - is the APR fixed or variable? If the rate is variable, what may seem like an attractive offer could have a price once the 0% honeymoon period is over. Market forces (such as the Bank of England's base rate) heavily influence a variable rate and these forces can change dramatically. The consequences could be that you go from zero to hero-sized interest payments very quickly, pushing the cost of the credit card loan up considerably. If you're lucky the payments could go down. This random variable is what card companies are trying to avoid, so even flexible APR rates don't change that much. You'll only really feel the impact at the end of a 0% offer. With a fixed rate your interest charges stay the same regardless of market fluctuations.
Look closely for hidden costs that are not included in the APR, the most common being payment protection insurance. With some lenders this isn't an optional extra - it's a requirement. It can offer you a measure of protection should your circumstances change, but there's always the chance that you'll be paying for an insurance policy that you don't actually need. Again, these charges are fully disclosed by the lenders - it's up to the consumer to make the decision as to whether they need the additional insurance or not. It's also a good time to check that your finances could cope with the additional expense of a credit card and the repayments incurred. A longer term repayment timescale may seem tempting because of lower APR, but factor into that equation the length of time you will be repaying both the loan and the interest charges and it could work out more expensive than you thought.
Finance and credit lending are considered by many to be a 'dark art', and APR calculation is no exception. Financial regulatory bodies and the Government are aware of the concerns of consumers, and put safeguards in place to ensure lenders comply with strict guidelines including full disclosure. The lenders are happy to comply with this, as it promotes an open and accountable market. APR attempts to create a clearly recognisable interest figure on a loan, showing the consumer exactly how much they can expect to pay. The loan amount doesn't change (in the initial calculation); it's the APR that's the variable (unless you go for a fixed rate option). By doing some research before deciding on a lender, the savvy consumer can find a good credit card deal with an APR rate that suits their finances. Look past the initial 0% sweeteners and at the subsequent APR rate that the credit card loan will incur once the introductory period is over.
Without taking into account APR, it is impossible to make an informed decision on which credit card deal is the best. The bells and whistles cards look tempting, but are designed with a specific type of customer in mind. If you don't fit the profile exactly, keep shopping around. To get the best deal, consumers need to be flexible and to take a little time studying the marketplace. That way they can avoid high APR rates that lay in wait for the unwary.
APR can be used to compare different credit and loan offers and includes such important factors as: The interest rate you have to pay, how you repay the loan, the length of the loan agreement, frequency and timing of instalment payments and amount of each payment, fees associated with the loan, premiums for payment protection insurance that the lender may choose to make compulsory All lenders have to tell you what their APR is before you sign any agreement, and as the APR has a direct bearing on the cost of your credit card loan, it pays to shop around before you decide on one particular card. There are plenty of very good offers available, if you're prepared to do your homework.
Once an attractive APR has caught your attention, the questions don't stop there. First and foremost - is the APR fixed or variable? If the rate is variable, what may seem like an attractive offer could have a price once the 0% honeymoon period is over. Market forces (such as the Bank of England's base rate) heavily influence a variable rate and these forces can change dramatically. The consequences could be that you go from zero to hero-sized interest payments very quickly, pushing the cost of the credit card loan up considerably. If you're lucky the payments could go down. This random variable is what card companies are trying to avoid, so even flexible APR rates don't change that much. You'll only really feel the impact at the end of a 0% offer. With a fixed rate your interest charges stay the same regardless of market fluctuations.
Look closely for hidden costs that are not included in the APR, the most common being payment protection insurance. With some lenders this isn't an optional extra - it's a requirement. It can offer you a measure of protection should your circumstances change, but there's always the chance that you'll be paying for an insurance policy that you don't actually need. Again, these charges are fully disclosed by the lenders - it's up to the consumer to make the decision as to whether they need the additional insurance or not. It's also a good time to check that your finances could cope with the additional expense of a credit card and the repayments incurred. A longer term repayment timescale may seem tempting because of lower APR, but factor into that equation the length of time you will be repaying both the loan and the interest charges and it could work out more expensive than you thought.
Finance and credit lending are considered by many to be a 'dark art', and APR calculation is no exception. Financial regulatory bodies and the Government are aware of the concerns of consumers, and put safeguards in place to ensure lenders comply with strict guidelines including full disclosure. The lenders are happy to comply with this, as it promotes an open and accountable market. APR attempts to create a clearly recognisable interest figure on a loan, showing the consumer exactly how much they can expect to pay. The loan amount doesn't change (in the initial calculation); it's the APR that's the variable (unless you go for a fixed rate option). By doing some research before deciding on a lender, the savvy consumer can find a good credit card deal with an APR rate that suits their finances. Look past the initial 0% sweeteners and at the subsequent APR rate that the credit card loan will incur once the introductory period is over.
Without taking into account APR, it is impossible to make an informed decision on which credit card deal is the best. The bells and whistles cards look tempting, but are designed with a specific type of customer in mind. If you don't fit the profile exactly, keep shopping around. To get the best deal, consumers need to be flexible and to take a little time studying the marketplace. That way they can avoid high APR rates that lay in wait for the unwary.
About the Author:
Jo Smart is a financial author that enjoys taking time to break down the facts about credit cards and other personal finance options. You can find out more about Low APR Credit Cards and other Credit Cards here.
posted by Credit Counseling at
8:24 AM
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