APR means annual percentage rate. When you make transactions on your credit card, you get a monthly bill. After this billing date you get a grace period which is around 2 – 3 weeks. This effectively means that if you made a purchase on the first day for $500, you are effectively getting an interest free loan from the credit card company for a period of one month plus the grace period. This is very profitable for the customer. But why would the credit card company take such a big risk and lose money in this fashion? The truth is that the grace period is more like an incentive to use the credit card and spend using it. However, the credit card does company does make a killing, when the customer fails to pay the monthly bill by the payment date.
Once the payment date is crossed, the customer is charged certain interest rate on the outstanding bill. However, this interest rate, which is the APR is much higher compared to normal loans. This is why customers should be careful in making payments by due date. APR depends on two things. The first is obviously the credit history of the person. Customers with good credit history usually get credit cards for less APR, but those with bad credit history have a massive interest rate to pay. Hence when you are taking a credit card, you must not only look at the starting intro APR, but also what it would be in a year`s time. Some credit cards, in order to attract customers who have outstanding balances with rival credit card companies, give a 0% APR for up to or at least 6 – 18 months, but then the APR jumps to 20% after the period which could be dangerous.
Another common condition that is attached to the APR are the terms for which its value is what it is. Meaning, some credit card companies offer, 0% APR on balance transfers, which means one will have to pay 13 – 20% normal APR on other purchases. In some cases, it could be more confusing e.g. 0% APR on balance transfers for a year and all other purchases for 6 months. Customers have to be cautious not to fall into this trap by forgetting the term periods. Hence low APR for a longer period of time might be the best option to choose from in most cases.