Credit Card Series -
The Terms and Conditions
What is APR?
APR: Annual Percentage Rate
Keep in mind:
- APR is the cost you pay for borrowing money for a year. If you don’t pay your credit card bill in full each month, this is the percent of what you’ve spent that you’ll have to pay in addition to the bill.
- For example, let’s say the APR on your credit card is 20% (which, just so you know, is quite high). Then let’s say you don’t pay your credit card bill in full, and have a $100 balance. So, you’d think that you just owe the $100. But, because your card has an APR of 20% added onto that $100, you will have to pay $20 in addition to the $100, resulting in a charge of $120 at the minimum.
- APR compounds over time! So if you still owe the $120 and don’t pay that charge PLUS the required interest, you could end up paying an additional 20% on top of the $120…and this is where the snowball effect of credit card debt begins.
- KEY: PAY YOUR CREDIT CARD BALANCE IN FULL EACH MONTH BEFORE THE DUE DATE.
- If you make this a habit, you don’t even need to worry that much about APR. We really cannot stress this enough, however…
- OTHER KEY: Look for credit cards that offer a 0% APR or at least a low APR...definitely at least strive for a much lower APR than 20%.
- Be wary, however, when credit card companies offer 0% APRs. They might just offer this for the first year, or the offer only applies to balances from other credit cards but not necessarily for your particular credit card. Make sure to read the fine print before making a commitment!
- Credit cards also love to offer a handsome incentive to get you to transfer over any balances from other credit cards, but this can be dangerous as there can be hidden fees or interest rates behind said incentive, so again, read the fine print!
- Ideally, the best option for someone getting a first-time credit card is to apply for one where they offer you a 0% APR for the first year or two at least. This is particularly helpful if you’re making big changes in your life such as moving into a new home, and therefore recognizing that you'll need time to pay off your new-home purchases.
- FINAL CAVEAT! Make sure that you pay your entire balance off before the 12-24 months are over and the new APR percentage kicks in. If you don't, the credit card companies will automatically apply the APR to any balance you owe which can be a real kick in the pants if you're not careful.
Still confused? Read more about APRs here.