Almost Priceless, Right? (or rather, APR)

APR… meaning Almost Priceless, Right?!

Wrong.

APR is the Annual Percentage Rate and it is the annual interest rate for your credit card.  Now, it says Annual on the cover… but, in reality, it is used to calculate interest on a daily basis.

If you wanted to find out exactly how much interest you are paying on your balance each day, you can calculate your daily interest rate from the APR by dividing your APR by 365 days. Each and every day your balance grows by that amount… every. single. day. Until you pay off your full balance.

Let’s walk through an example together:

You have a beautiful, shiny American Express card – it has platinum written on it so you feel like a total boss. You swiftly rack up a pretty little $1000 balance on that bad boy. Now let’s pretend that your APR is 20%. If we divide 20% by 365 days in a year, we get a daily rate of approximately .05479%. So every single day, .05479% interest is calculated on your outstanding balance – and remember, as a result of daily interest, your outstanding balance is always increasing.

Outstanding balance Outstanding balance
Day 1 $1000.00 Day 16 $1008.25
Day 2 $1000.55 Day 17 $1008.80
Day 3 $1001.10 Day 18 $1009.36
Day 4 $1001.65 Day 19 $1009.91
Day 5 $1002.20 Day 20 $1010.46
Day 6 $1002.74 Day 21 $1011.01
Day 7 $1003.29 Day 22 $1011.56
Day 8 $1003.84 Day 23 $1012.12
Day 9 $1004.39 Day 24 $1012.67
Day 10 $1004.94 Day 25 $1013.23
Day 11 $1005.49 Day 26 $1013.78
Day 12 $1006.05 Day 27 $1014.34
Day 13 $1006.60 Day 28 $1014.89
Day 14 $1007.15 Day 29 $1015.45
Day 15 $1007.70 Day 30 $1016.01

If you pay off your credit card in full every month – no problem, no interest is accrued or due. If you don’t, that is where the trouble begins. Most credit card companies have a grace period of at least 3 weeks between a purchase made and interest being applied to your balance – this is the time you have to pay off the purchase (usually the period between monthly balance statements).

However… if you don’t pay the balance in full by your payment due date, you are forfeiting this grace period and the interest accrued during the grace period (in addition to next month’s interest) will all show up on your next balance statement. Every credit card is slightly different so you should look at the terms and conditions of your particular card to know the details of interest accrual.

So in our example of the $1000 statement on the Amex – if you didn’t pay off the $1000 at the end of the month when you received the statement, next month’s bill would be $1033.41 (not including any minimum payment made or non-payment fees you might incur). Is $33 the end of the world? No. But if we were talking about $10,000 instead of $1000 – that $330 would hurt a lot more. Now imagine you haven’t paid that balance off for months and months (or worse… years… face palm).

Another important point to note is that different interest rates may apply to different things – if you are using your credit card for purchases, it is pretty straightforward. However, if you are using your card for cash withdrawal (usually a higher interest rate) or balance transfers from other credit cards, the APR will be different.

MORAL OF THE STORY:

Pay off your credit card in full, every single month

Sincerely yours in harmonious fun and fiscal responsibility,

Rachel

7 thoughts on “Almost Priceless, Right? (or rather, APR)

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