How to Calculate Your Credit Card APR

by Junior Boomer on July 19, 2010

Understanding the cost of using your credit cards requires that you understand how your Annual Percentage Rate (APR) is calculated.  The more you know regarding your personal finances, the harder you will try to stay or become debt free.  The APR is the interest rate charged to you for the privilege of borrowing money.  It’s calculated on a yearly basis.  If you are comparing one credit card to another to determine which one offers the best deal, you can compare each card’s APR to see which one will cost you the most when you borrow money.

Credit Card APR
Creative Commons License photo credit: Qiao-Da-Ye??????

How to Calculate Credit Card APR

On your credit card statement, you’ll see the finance charges shown as a monthly or daily periodic rate as well as the annual percentage rate.    To calculate the APR as a monthly rate, you divide your total annual percentage rate by 12.  If your annual percentage rate is 19%:

19% divided by 12 = 1.6%.If you want to figure out how much it’s costing you per month to borrow money with your credit card, you can calculate it using the monthly periodic rate shown on your statement, multiplied by the Average Daily Balance.

If you average about a $400 credit card balance:

$400 x 1.6% = $6.40.

Understanding Credit Card APR

If you take the time to figure out how much you’re actually paying to use your credit cards, it’s probably going to encourage you to become more careful with your credit card use.  Responsible credit card use doesn’t cost much (if anything) more than using cash – for people who pay their balances off in full each month during the grace period.  When you start carrying a balance from one month to the next, you pay interest and fees.

Also look for credit cards that do not charge annual fees, or charges a low annual fee in exchange for a very low APR.

When comparing credit cards, always look at the APR to determine which card offers the lowest cost of borrowing.  It’s also a good idea to get a credit card that offers a low APR for both balance transfers and new purchases whenever possible as it’s easier to keep track of your finances when all balances on the credit card receive the same APR.

If you currently have credit cards with balances on them, try to pay more than the minimum monthly payment each month.  The faster you pay off the debt, the less interest you will pay.  In some cases, finance fees and interest cost more than the minimum payment, which means if you are only sending the minimum payment each month (even if you’re sending it before the due date) you could wind up with a balance that is larger the following month!   If possible, consider transferring high interest credit card debt to another credit card with a lower APR, or paying if off with a low interest loan.

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