You’ve likely seen APR written all over the place. You can find it in car commercials and credit card ads, but what does it mean? APR is short for Annual Percentage Rate. Over the course of the year, this is the total percentage in interest on your debt you would pay.
If I have a credit card with 29% interest does that mean I pay 29% every month if I carry a balance on my credit card?
No, the way the interest is calculated for your bill is not as straightforward. Let’s talk about it.
There are 3 ingredients to calculating monthly interest:
- Let’s begin with DPR, the Daily Periodic Rate. This is the APR broken down day by day. For example, using that that same 29% APR from earlier, we would divide that by the number of days in the year, 365. In this case, the DPR is 0.07%.
- Then we need to talk about your billing cycle. This is the number of days included in the bill you get once a month. For example, your billing cycle could be from the 15th of one month to the 15th of the next month. Then the credit card company would collect all that information and send you a bill for that cycle’s purchases. Often, the billing cycle is 30 days.
- The last ingredient is the balance that is subject to interest. If you pay off your entire balance by the due date then you don’t even have to worry about interest. Nice, huh? But if you are not able to pay it all off, then the balance you carry over will be subject to interest. So if you carry a balance for an entire year, you’ll have paid the Annual Percentage Rate (APR).
You multiply all three of these together and that will be your total amount due for that bill, including interest.
DPR x Balance Subject to Interest x Number of Days in Billing Cycle= Total Due
In an ideal world you’ll be able to pay off your bill on time so you won’t have to worry about interest in the first place. But if you’re not at that point, no big deal. Now you’re more knowledgeable about how interest is calculated on your balance and how to understand APR offers.
How do you feel about your current APR? Too high, just right? Comment or Tweet me, I’d love to know!