All you need to know about APR while choosing a credit card

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All you need to know about APR while choosing a credit card

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To understand how APR calculation should be used for choosing a perfect credit card, we need to first know the basics of APR and its limitations.

What is APR?

APR is the annual percentage rate that is mandatory for every financial institute to calculate the amount due on the loan that gets carried forward at the end of the grace period.

When the APR calculation is high, the financial charges for using your credit card will be higher. Different financial institutes have different APRs calculated on purchase, balance transfer and cash withdrawal.

How to calculate APR

The annual percentage rate of interest or APR is calculated on the total outstanding on a card at the end of the month. For instance, if there is a balance of 100 units of currency at a certain due date and the card holder is only able to repay 90 units of that within that date. Then the outstanding amount will only be 10 units, but the interest will be calculated on the 100 currency units. That is the reason why small outstanding amounts on a credit card can quickly increase due to late fees, and interest charges.

Limitations of APR

APR is not calculated on fixed parameters. Processing fees for the loan, private mortgage insurance as well as discount points might be taken into consideration while calculating APR. These parameters further increase the effective finance charges. Hence, an APR can be considered as a snapshot, whereas at times a video image is required to get a clear idea. So, you need to see the tenure of the loan and the elements that have gone into the APR calculation. Some high upfront charges or fees are spread out over the whole tenure of the loan at the time of APR calculations, thus making it look low, whereas the actual burden might be higher.

Some other important factors

First, there are different rates of interest for each type of transaction - shopping expense at the point of purchase, balance transfers of outstanding amounts, and cash advances taken using the credit cards. The APR would be different for each of these, so it is advisable to get the full details. Second, there is an interest free grace period that each card offers, and if judiciously used; it can reduce the effective APR on the card. Finally, the APR reflects not only the rate of interest but also the fixed charges, like late fee, overdue charges, and an annual fee. One should know all these separate charges at the outset, to avoid nasty surprises later.

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