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The APR, or the annual percentage rate is, basically, the interest that you pay for borrowing money. You can find your APR in credit card terms. Usually, the APR is in direct correlation with your credit score: the worse your credit score rating is, the higher your APR will be. For example, for bad credit APRs tend to be around 23%, sometimes up to or exceeding 30%, but for good or excellent credit they can come down to 18% - 9%.
The APR formula is calculated the following way. However misleading it may seem, APR is not calculated on an annual basis. In fact, the interest is charged every day to your card. This is called a daily periodic rate (DPR). To calculate it, you need to divide your APR by 365. Say, your APR is 15%. Therefore, your DPR is:
15 / 365 = 0.041%
This is going to be used to calculate your monthly finance charge for a given billing cycle. However, your balance isn't also stable. You may charge or pay back sums during the month. That's why that interest is charged to your average daily balance.
How does the card issuer calculate that? The average daily balance is the total amount of daily balances in your account divided by the number of days in the months. Then this average daily balance is used to calculate your monthly interest payment: the average daily balance is multiplied by the daily periodic rate and then by the number of days in the billing cycle.
Let's say you didn't make any purchases during the month, nor did you make any payments, and you carried a balance of $1000 to the next month. In that case your average daily balance is:
$1,000 * 30 / 30 = $1,000
The interest charged this month is $1,000 * 0,00041 * 30 days = $12.3
Not surprising, right?
But let's change the parameters. During the first 10 days you didn't do anything, then you charged additional $300, didn't do anything for 10 days more and then made a payment of $800.
This makes your balance history the following:
Days 1-10: $1000
Days 10-20: $1300
Days 21-30: $500
Your average daily balance is: ($1,000 * 10 days) + ($1,300 * 10 days) + ($500 * 10 days) / 30 = (10,000 + 13,000 + 5,000) / 30 = 28,000 / 30 = $933.33
Your monthly interest payment will be the following:
$933.33 * 0,00041 * 30 days = $11.48
And your minimum monthly payment will be 2% (on average) of your credit card balance plus the monthly interest charge and any monthly fees. Thus, your monthly payment due will be: ($933.33*0.02) + $11.48 = $30.15.
Your interest decreased because you paid a large sum ($800) at the end of the month, which not only canceled your additional charges, but lowered your balance.
If you charge more during the month and don't pay anything back, your interest payment will increase.
Basically, the key to sustaining a good balance is not charging more than you can pay at the end of the month. Try to keep your balance at 30% -10% of your available credit. This way you will be able to build a good credit history while having some room to wiggle.
However, sometimes you need to use your credit card to make big purchases like a PC or paying medical bills. In that case you can use credit cards with 0% intro APR (intro period can last up to 18 months) and pay off your balance in full during the intro period with no interest added.
