If you’re wondering How Does Credit Card APR Work?, this article is for you. The four main methods are Variable, Fixed, and Penalty. This article will explain each one in detail and explain how they differ. We’ll also cover how the Average Daily Balance method works. And remember, a higher APR means higher interest!
Variable
The variable APR on your credit card will fluctuate from time to time. Banks cannot adjust these rates without notifying cardholders. The rate changes based on the prime lending rate published in the Wall Street Journal. This rate is the interest rate large banks charge one another to balance their books. Because variable APRs can vary, it’s important to understand the new rate before applying for a new card.
Most credit cards have variable APRs. The prime rate is the lowest rate banks charge their best customers. The Wall Street Journal’s consensus determines the prime rate. Moreover, your variable APR will change with the prime rate. In the event of an increase in the prime rate, your APR would go up by two percentage points. This would cost you an extra $200 a year.
Fixed
Most credit cards are variable, meaning their interest rate will change according to a specific index, such as the prime rate. A fixed APR will remain the same no matter what happens to the prime rate, but it will be lower than the variable rate. However, because the prime rate can change if the Federal Reserve raises its interest rates, a fixed APR can still change. It is advisable to check your statement each month or get an email alert if your interest rate changes.
These cards generally have a lower APR than their variable counterparts and are beneficial in times of low-interest rates. Unlike variable cards, however, fixed cards do not come with a lock-in period and can be subject to change. It is important to understand the APR on credit cards before deciding which one to choose.
Penalty
If you have a credit card with a penalty APR, you should check your agreement carefully. If the card offers this option, make sure to pay the minimum payment, usually two to three per cent of the balance each month. If you can’t make this minimum payment, you will also have to pay the interest. This can lead to significant damage to your credit score. Avoid using the card if possible.
To avoid triggering a penalty APR, you must make at least six on-time payments. This means you can’t fall behind on payments during the promotional period. However, if you’re 60 days late on your payments, you may be subject to this penalty APR. Even if you make timely payments for the next six months, the issuer may decide to raise your interest rate. Typically, a credit card issuer will need to give you a notice about the increase. It will take effect 45 days after the notice is sent. You’ll pay a higher interest rate on purchases and balance transfers until 45 days have passed. In addition, you’ll lose any promotional offers that you have benefited from.
Average daily balance method
This calculation involves dividing the daily balance by the number of days in a billing cycle. Next, you multiply that number by the interest rate for that month. The APR is based on the interest rate multiplied by the number of days in the billing cycle. This formula results in an APR of 20%.
This method is the most common and simplest to understand. It involves calculating the average daily balance, which credit card issuers use to calculate finance charges. These charges are the interest that a credit card issuer applies after the grace period expires. The amount that you owe will rise if you pay the finance charge, so making a payment every day can significantly lower your overall cost. Because the balance of a credit card account is constantly changing as the cardholder makes payments and purchases, the bad credit card issuer needs to determine how much they’ll need to collect by the end of the billing cycle.
