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When you get a new credit card, you’ll often see a range of numbers: minimum monthly payments, due dates, balance transfer fees, and something called the “annual percentage rate” (APR).
You may have heard of APRs when it comes to home loans — and if you’re a veteran home buyer, you know they’re not the same as interest rates.
But what about credit cards? How do issuers calculate their APR vs. interest rate? And does it matter?
Lenders calculate APR by combining the cost of interest plus the cost of fees, resulting in a number that’s essentially the cost of borrowing money. The Truth in Lending Act requires lenders to advertise a loan’s APR — as opposed to its interest rate — because it’s a more accurate reflection of the loan’s total cost.
Your monthly mortgage payment, for example, might include an array of finance charges, from your loan origination fee to your mortgage insurance to closing costs. All those fees, plus interest, must be included in the APR disclosed by the lender.
But whereas interest and APR are different for mortgage loans, they’re interchangeable when it comes to credit cards.
You don’t pay an origination fee with credit cards, and most of the other fees are optional. (You’ll pay annual fees whether or not you make purchases, so they’re not a cost of borrowing — and aren’t included in APRs.)
The bottom line: with credit cards, your APR is the same as your interest rate.
That doesn’t mean credit cards are free beyond interest fees, though. Their additional costs can include:
Read this post for more on how paying a credit card works.
Your credit scores affect a range of things, including your ability to get a home mortgage or credit card, the size of your credit line — and, you guessed it, your APR.
You can see your credit card’s APR by looking at the last page of your statement. Different rates apply to different credit card balances, which come from different activities. They include:
When applying for a credit card, you can check all the APRs and fees in a designated card summary, known as a Schumer Box.
Most credit card APRs are variable (which makes them very different from, say, a 30-year fixed-rate mortgage).
Here are three situations in which your APR might change:
Here’s more on how credit card companies calculate APR.
Although lower interest rates are always attractive when you’re borrowing money, they don’t have to matter for credit cards.
Because, when you use a credit card strategically, you can avoid paying interest completely.
Most credit card issuers offer a “grace period” after you make new purchases, which means you won’t accrue interest charges until after your statement’s due date. If you pay off your credit card’s statement balance each month, you’ll never pay interest on your purchases with most cards.
To get started, here are the best credit cards available today.
An interest rate is just that — the rate at which a balance incurs interest charges. An APR (annual percentage rate), on the other hand, encompasses the interest rate PLUS any fees. “APR” and “interest rate” are usually interchangeable when it comes to credit cards, and only tend to differ when it comes to loans.
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