Calculations: Breaking Down Your Credit Card APR
When you have a credit card, you know that you are going to pay a certain amount in interest every year, This equates to some percentage of your credit card balance. It can be fairly low (9%-12%) for those with excellent credit or mid to high (13%-23% or more) for others. Everyone knows that carrying a balance on your credit card, combined with the APR can really add up. However, do you know how to break it all down and find out exactly what you are paying over a shorter period of time?
Calculating Your APR
Under the Truth in Lending Act, your credit card company is required to inform you of the APR that you are paying by ensuring that the rate is visible on your bill. Unfortunately, they are only required to tell you the yearly rate. They do not have to break it down for you into monthly and daily rates. No problem. You can still figure this one out on your own.
Look at your billing statement. Your credit card company either lists your finance charges at a monthly or daily rate, also called a periodic rate. To calculate your monthly rate, multiply your interest by 12. Then, to determine your monthly finance charge, take your average daily balance and multiply it by the monthly rate. If your company is in the habit of conveying your charges as a daily rate, you will need to divide your APR by the number of days in the year.
Something to Keep in Mind
Your APR is, by no means, set in stone. You might have an introductory APR that lasts a certain term or your credit card company might change your rate at their discretion. Credit card companies can change their policies, with or without reason. All they have to do is give you some short notice that the change is coming. Sometimes, it is as simple as the company trying to rescue themselves from the bad customers they have encountered, raising good customers’ rates to make up the difference. Often, however, it is because of your own situation.
If you think the credit card company is not watching you, think again. Just because you pay your credit card balance on time does not mean a thing. credit card companies periodically check customer credit reports. If you have had any difficulties in some other financial area, they will find out. The red flag goes up and now you are a high risk customer, causing your rates to soar. Fair? No, not really. Reality? Yep.
The best way to protect yourself is to pay all of your bills on time each and every month, so as to have nothing negative reflected in credit report. If you find yourself in difficulty, contact your creditors beforehand to see if you can work out a deal. Often, this will result in cooperation and will leave the difficulties unreflected on your credit report.
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