Sponsored by Salal Credit Union
Welcome to the Glad You Asked series, a shame-free zone where we tackle topics you’re too embarrassed to ask even your BFF about. Don’t worry, we gotchu.
“Our 2.39% APR offer is the lowest rate of the season!” a salesman on TV shouts at you from a used car lot. “Get it while it lasts!” Suddenly the commercial is over and I’m left wondering: What does that mean?
Various annual percentages are touted by credit card providers and other lenders all the time. But when I applied for a new credit card last month, I panic-texted my dad to confirm that the offer rate was actually reasonable before signing. So now I have my very own credit card with a 13.23% APR?—?and still no idea what that actually means.
APR stands for “annual percentage rate,” and it’s a type of interest rate?—?in other words, the amount you have to repay for the privilege of borrowing money. Let’s take a look at what that means, and why it’s so important.
“Fixed rate APR” versus “Variable APR”
There are two categories of APRs and here’s the difference:
A fixed rate APR means the percentage you agreed to can only be changed in a limited set of circumstances. It also means the lender has to send you notice of a proposed rate increase and you have the right to say no. Sounds good, right? Unfortunately, fixed-rate offers have been virtually non-existent since 2009, when the Credit Card Accountability, Responsibility and Disclosure Act law passed and put stricter conditions on lenders.
A variable APR means that the APR is subject to change based on a few things. The most common is that lenders reserve the right to increase your APR for violating your credit card agreement?—?like making a late payment.
APRs are calculated by adding something called the “US prime rate” to a “spread percentage.” Here’s what those terms mean:
- The US prime rate is the average of all the interest rates that financial institutions offer to their most creditworthy customers. It rarely fluctuates a significant amount, so it probably won’t affect your APR. The US prime rate is currently 3.50%.
- The spread is the percentage above the US prime rate that a credit card issuer charges you based on your credit history. If you have a poor credit score, your spread is going to be higher than someone who has never missed a payment.
For example, my variable APR breaks down like this:
One credit card, several APRs
When you accept a credit card offer, you’re most likely agreeing to several different APRs depending on how you use your credit card. Some of the most common rates are:
Purchase: This is the most common type of APR. It’s the one that gets applied to any purchase you make using your credit card.
Cash Advance: Since lending cash is riskier for lenders than extending credit, they charge higher interest rates to customers who ask for cold, hard dollar bills.
Introductory: Many lenders offer special, low APR deals for a set period of time after sign up. These low rates typically last for 1–2 years, so take advantage of them while you can.
Penalty: A penalty APR is usually the highest of all, since it’s only used in the rare instance when you violate part of your agreement, like making a late payment.
What this all means
APR is the main factor in determining how much money you have to pay the lender back after borrowing money. They figure out the payment by calculating what your APR would be if it was a daily, rather than annual, rate. This daily periodic rate is then multiplied by the number of days in your billing cycle. Finally, that figure is multiplied by your balance to determine your interest payment for that month.
The bottom line is that the higher your APR is, the more interest you’re going to pay for carrying a balance on your card. Simply put, you want the lowest APR you can get.
If you’re doing your research right, you’ll probably find the Salal Credit Union Balance Transfer promotion deal. Salal Credit Union is offering 0% APR for 12 months (now THAT is really the lowest APR you can get). You also won’t have to worry about paying any fees on balance transfers, making it easy to pay off your debts without interest for a full year.
There’s no reason to panic-text your dad anymore?—?you can use this new knowledge to intelligently compare offers from different lenders all by yourself.