Your APR is not really your annual rate of interest

Annual Percentage Rate or APR is a term widely associated with credit cards but is hardly ever understood correctly. One of the most common misconceptions is that it is the annual rate of interest.

Although APR is an annual rate since it is charged monthly, in effect it translates into much more. For example if you owed $100 for 12 months and the annual rate of interest was 12.99%, at the end of 12 months you will have to pay $112.99. However since the APR is charged on your credit card balance every month, in the case of credit cards you have to pay slightly more.

Here is how it works. Suppose your APR is 12.99%, so that means per month it will be 12.99% / 12 which is 1.0825% per month.

So if you have taken a loan of a $100 for the first month, at the end of the first month you will owe 101.0825.This is how it will look like for the 12 months.

So you see in the above example that at the end of the year you will have to pay 113.79 and not 112.99 as would have been the case if APR were the annual rate of simple interest.

APR also includes fees and other charges which can’t be calculated like simple interest therefore it becomes difficult to calculate APR sometimes.

Your best bet when comparing two cards is to evaluate the fees of the two cards and the interest they will charge to the outstanding balance separately.

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