APR vs Interest Rate in Credit Cards

apr-vs-interest-rate

When you are going for a credit card, you are often misled by the credit card offers that guarantee 0% APR, no hidden fees etc. However, before you take a decision on going for a new card or switching to another option, you need to know the following credit card numbers that matter.

Interest rate vs APR

An Interest rate is an annualized percentage charged by the bank or lender to draw profit from the loaned amount. The interest rate is used to calculate the payment due on a monthly basis. These monthly payments have the principal repayment part as well as the interest part.

The APR or Annual Percentage Rate on the other hand, is the total cost of your credit card expressed as an annual rate. This cost will include the actual Interest rate mentioned above plus a variety of fees and charges as follows:

  • Loan processing and document preparation fees
  • Application fees
  • Any legal or attorney charges
  • Insurance on credit or mortgage insurance charges
  • Any applicable taxing component

The 0% APR Mystery

There are many credit card offers that boast 0% APR which is probably true to start with. However, what they do not tell you upfront is how long this 0% rate is valid. Usually, the 0% rate is valid for a particular period and after that a very high APR rate may be applicable. Hence you may go for such cards ONLY if you are in a position to close off your credit card debt within the zero percent APR validity period. This may be a good option for balance transfers from other cards as long as you are very prompt on paying back.

Low Iinterest rates option is the alternative to 0% APR when you know that you are going to have manageable credits from month to month and want to benefit from the long term point of view. However, this doesn’t help you with huge balance transfers.

If you have huge credit card outstanding, then a good strategy would be to get started with the 0% APR and then switch to a low interest rate card within a year or so.

APR vs EAR

EAR or Effective Annual Rate or Effective APR is the compounded interest rate applied per month or quarter (as per the rule) where as APR is the annual simple interest rate.

Before committing yourself to any credit card or loan, ask your banker or credit company for more details on how the interest rate is calculated. You must also inquire about the 0% validity period if any and about hidden charges and fees.