Many people obtain credit cards as easily as buying clothes. Financial experts advise that you should consider certain factors before signing up for such a card. That piece of plastic is a great thing to have, but many people have been buried by huge debts because of their misuse.
One of the things to consider when obtaining a card is the annual percentage rate or APR. The annual percentage rate determines how much you would owe the credit card company if you do not pay the balance in full. Credit card companies are obliged to tell clients the APR. Different lenders may have different computations for the APR. There may be another APR computation for cash advances on your account versus purchases on the card. You have to understand how this annual percentage rate is computed when deciding which company to choose.
Calculation of APR
The annual percentage rate should be considered as the rate for a payment period. The value of the APR is divided into the number of payment periods per annum. If the company provides an APR of 20%, the monthly rate would be 1.67%. The value is determined simply by dividing 20% by 12 months. The monthly balance on the account is based on this rate. Of course, a company imposes its own annual percentage rate. So it is important to know exactly what the annual rate and period rate is before signing up.
There are two types of APR: variable and fixed.
People applying for credit cards should understand the difference between variable and fixed APR, otherwise they could fall into a trap.
A variable annual percentage rate involves a reference rate. A marginal rate is added to the reference rate. The variability of variable APR is governed by changes in the reference rate. One example of a reference rate is the US Prime Rate. If this changes, so will the value of the APR (in the case of the variable type). The credit card company will adjust the APR every month or every three months. The frequency of the APR changes should be indicated in the card agreement.
The other type of APR does not involve a reference rate. As the name implies, a fixed APR has greater stability than the variable APR. This means that your account balance is charged the same rate every period. However, the APR can still shift on certain occasions. The company may change the rate at some point, but they are legally obliged to inform credit card holders regarding such changes.
Knowing how the annual percentage rate is computed helps consumers make the right decision when assessing credit card companies. The APR type is also an important factor. Before you make decisions, take time to read the agreement.
Furthermore, before you look for the best credit cards, consider your spending behavior and compare the offers. Before you bite the offer of a company that offers the lowest interest rate, look for probable disadvantages.
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