If you’re like most people, you probably don’t understand what APR stands for, let alone how it applies to your finances. However, you probably know that it affects how much you pay each month for your credit card bill, and if you’re running a business, understanding APR thoroughly is crucial.
So, what is APR on a credit card, and why is it important? For starters, every dollar matters when you are trying to get a new business off the ground. Even established companies with steady profits can have their cash flow messed up with poorly chosen APR; after all, credit cards should be all about saving on unnecessary expenses so that you can fund the important ones.
So, without further ado, this article will explain what APR is and how it works. We’ll also discuss the different types of APR and how to avoid paying high interest rates.
What Does APR Stand for?
The acronym “APR” stands for “Annual Percentage Rate” and refers to the total share of your principal you will be charged within a year on your credit cards, personal loans, auto loans, or other lines of credit. This figure represents the actual yearly cost of borrowing funds, including any fees or additional charges that may apply, which is why it’s a more informative number than just the interest rate.
APR on a credit card can be fixed or variable, which will define how your APR is calculated. Fixed-rate APR means your credit card interest rate will remain the same for the life of your loan. Variable APR means that your rate can change over time, usually in response to changes in the market.
Both have their up-and downsides: Fixed APR allows you to make long-term plans, but it might be costlier than necessary in the long run, if the market becomes favorable. Variable APR enables you to capitalize on a favorable market rate, but can also hike your interest up much higher than initially planned.
How Does APR Work on a Credit Card?
You should be familiar with the factors influencing your APR when choosing a credit card for your small business to ensure it won’t eat into your profits too much.
Your credit card interest rate will be based on your credit score, i.e., your credit history, amount of debt, and other factors. For example, if you have a good credit score, your card’s APR will likely be low.
Other factors affecting the credit card’s interest rate include the card type and prime rate (if you have a card with a variable APR).
The prime APR for credit cards is the rate banks charge their most creditworthy customers. The prime APR can change from time to time, depending on the federal funds rate and overall economic conditions. The prime APR tends to be higher when the economy is strong, and vice versa.
The prime APR is an important benchmark for other rates, including the rates that credit card issuers charge. Credit card issuers often use the prime APR as a starting point when they set their own rates.
What Is The Difference Between APR and Interest Rate?
The annual percentage rate (APR) and interest rate both describe the cost of borrowing money. However, the two concepts are actually quite different.
Credit card interest rates are simply the percentage of the loan amount the borrower will pay in interest charges over a year. APR, on the other hand, is a more comprehensive measure that takes into account not only the interest, but also additional associated costs, such as points, fees, and closing costs.
As a result, APR is generally higher than the interest and is a better indicator of the true cost of borrowing money for your business, especially if your company has a bad credit score.
How is Credit Card APR Calculated?
APR is the annual interest, but if you want to know how much you’ll be paying in interest per day, simply divide your APR by 365, and you’ll get your daily periodic rate. For example, if your APR is 15%, your daily periodic rate would be 0.041%.
To calculate the monthly credit card interest charge with an average daily balance of $1,000, you would multiply the daily periodic rate by 30, giving you an interest charge of $12.33.
Other Types of APR – Introductory, Cash Advance, and Penalty
While we are most familiar with the annual percentage rate (APR) for purchases, there are three more kinds of APR relevant for credit cards:
This is the low- or no-interest period credit card companies often offer as a way to gain new customers. If your business is eligible for that, such a business credit card could be a good solution for covering the costs of inventory or equipment, especially in the initial phases.
An integral part of intro APR’s meaning is that it doesn’t last forever: Afterwards, it will revert to the standard rate for your card. Unfortunately, cards with introductory rates often have a regular purchase APR after a significantly higher grace period. If you can pull off paying your debt in full before the grace period ends, that would be the ideal arrangement.
Cash Advance APR
You’ll pay this interest rate on cash advances from your credit cards. These interest charges are typically much higher than the standard APR, so it’s best to avoid borrowing more money than you already have.
This is the high annual percentage rate for a credit card you’ll be charged if you make a late payment on your credit card bill.
How To Avoid Paying High Interest Rates
There are a few things you can do to avoid paying high interest on your card balance. First, try to pay off your balance in full each month to avoid paying any interest at all. Second, if you can’t pay it, at least make your payments on time, as late payments mean higher credit card interest rates. Finally, you can transfer your balance to a card with a lower APR. If the special APR for that isn’t too high, it can save you money in the long run.
All in All
The takeaway is that different APRs can significantly impact your finances and business cash flow, so it’s essential to be aware of them.
Now that you’ve had credit card APR explained, here are the key points: Avoid paying high interest by paying off your balance in full by the end of your monthly billing cycle, never miss a payment entirely, or transfer your balance to a card with a lower APR.