Wednesday, May 30, 2007

Importance of APR

But be warned that the lowest APR is not necessarily the best way to compare credit cards. A credit card with a lower APR might have the following hidden costs:

1. annual fees,

2. charge you an application fee for taking out your credit card,

3. have a low introductory rate but on expiry of same will revert to a much higher rate than its rivals,

4. charge you for withdrawing monies from a cash withdrawal dispenser,

5. have higher charges for missed payments

6. other ways to make up the difference between their headline rate and the actual rate they should be charging.

The introduction of the APR in annual terms was created to bring uniformity to credit card comparisons. Previously credit card companies could advertise their interest rates monthly, yearly or in any other manner they saw fit. In order to calculate your monthly payment you multiply the amount borrowed by the APR and divide by twelve e.g. £400 (amount borrowed) and multiplied by the APR (say 15.4%) and divided by 12 (months in a year) = £5.13.

However, it is likely that you will purchase further goods/services on credit and consequently increase your outstanding balance. You might only make the minimum payment requested or you might clear a larger chunk of your debt. Whichever way you choose to repay, you will find that you will be paying interest not only on interest charges but annual fees or fees for missed payments as well (always check the terms and conditions of your credit card). So the way you use your account will be different to how everyone else uses theirs e.g. if you hardly ever have a balance outstanding on your credit card you might, for instance, be better off with a 8% APR than one with a 6.5% but which has an annual membership fee of £20. Therefore the APR calculation as shown above will help you compare the cost of borrowing against another card with a different APR.

To sum up, always compare the terms and conditions imposed by the credit card companies before applying for their credit card/s. This will also be another factor in deciding which card to apply for rather than just being influenced by a catchy headline APR.

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