Understanding APR on Credit Cards: Meaning and Types

Posted on Friday, June 28th, 2024 | By IndusInd Bank

When navigating the world of credit cards, one term you’ll frequently encounter is APR, or Annual Percentage Rate. Understanding APR is crucial for effectively managing your credit card debt and making informed financial decisions. In this blog, we’ll break down what APR means, the different types of APRs and highlight how IndusInd Bank Credit Cards can offer valuable benefits to your lifestyle.

What is APR?

APR stands for Annual Percentage Rate, and it represents the cost of borrowing money on your credit card, expressed as a yearly interest rate. This rate is applied to any balance that you carry over from month to month. Essentially, APR indicates how much you’ll pay in interest if you don’t pay off your full balance by the due date.

Types of APR

There are several types of APRs you might encounter with credit cards, each serving a different purpose. Here’s a closer look at the most common ones:

• Purchase APR

This is the interest rate applied to purchases you make with your credit card. If you carry a balance on your card, the purchase APR is the rate that will be used to calculate the interest on that balance.

• Introductory APR

Many credit cards offer an introductory APR, which is a lower rate (sometimes 0%) for a specified period, often ranging from six to twelve months. It usually applies to purchases, balance transfers and sometimes both. It’s mostly a promotional rate designed to attract new customers.

• Balance Transfer APR

The balance transfer APR is the interest rate applied to balances that you transfer from another credit card to your current card. Often, credit cards offer a lower introductory rate on balance transfers for a limited time.

• Cash Advance APR

This is the interest rate applied to cash advances taken from your credit card. Cash advances typically have higher APRs compared to purchase or balance transfer APRs, and they may also come with additional fees.

• Penalty APR

If you miss a payment or violate other terms of your credit card agreement, you might be subject to a penalty APR. This is a higher interest rate that can be applied if you don’t adhere to the card’s terms and conditions.

• Variable vs. Fixed APR
  • Variable APR: This rate can change over time, usually in relation to an index such as the prime rate. Your card’s terms will specify how often the rate can change.
    
  • Fixed APR: This rate remains constant over time, though issuers can change it with prior notice.

How is APR Calculated?

APR is calculated by taking the periodic interest rate and multiplying it by the number of periods in a year. Credit card issuers typically use a daily or monthly periodic rate to calculate interest on balances.

Here’s a step-by-step breakdown of how APR is calculated:

• Determine the Periodic Rate

For a daily periodic rate: Divide the APR by 365 (the number of days in a year). For example, if the APR is 18%, the daily periodic rate would be 18% / 365 = 0.0493%.

For a monthly periodic rate: Divide the APR by 12 (the number of months in a year). For example, if the APR is 18%, the monthly periodic rate would be 18% / 12 = 1.5%.

• Calculate the Interest

If your card uses the daily periodic rate, the interest charged each day is calculated by multiplying the daily periodic rate by the balance at the end of that day.

For instance, with a balance of ₹10,000 and a daily periodic rate of 0.0493%, the daily interest would be ₹10,000 x 0.000493 = ₹4.93. This interest is then added to your balance, and the next day’s interest is calculated based on the new balance.

• Annualize the Interest

To understand the annual impact, you need to realise that the daily or monthly interest accumulates over the year. The total annual interest amount divided by the average balance gives you the effective APR. Understanding this process helps in grasping how carrying a balance affects your overall interest costs, emphasizing the importance of paying off balances as quickly as possible.

Why APR Matters?

Understanding the APR on your credit card is essential because it directly affects how much you’ll pay in interest if you carry a balance. A lower APR means lower interest charges, which can help you save money and pay off debt faster. Always consider the APR when comparing credit card offers, especially if you plan to carry a balance from month to month.

Conclusion

Understanding APR and the different types associated with credit cards is crucial for managing your finances effectively. By choosing a credit card with a competitive APR and valuable benefits, such as those offered by IndusInd Bank, you can make the most of your spending while minimizing interest costs. Whether you’re looking for reward points, introductory offers, or exclusive privileges, IndusInd Bank Credit Cards provide a well-rounded package to meet your financial needs.

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Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.