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The Bright Life guide to "APR" - what's it all about?

Your fast guide to understanding the APR - all those questions you were too scared to ask!
June 18, 2020
Alex Seyfert
Head of Product and Co-Founder, Bright Money
Avi Patchava, Varun Modi, Amit Bendale, Avinash Ramakanth, Deepak Thakkar
Published on December 11, 2019

Understanding that APR stuff is make or break to having a healthy relationship with our credit cards. But sometimes, it is one of those terms that everyone is using, and so we just didn’t ask more to really figure it out.

Well here’s your Bright Life Guide to what APR means and how to apply it like a pro.

The Annual Percentage Rate (APR) is the annual rate of interest that an individual pays on a loan or their credit cards. APR is a term used across the board whether for mortgages, auto loans, personal loans, or with your credit cards.

When deciding between credit cards, comparing the APR on each card is your single most important factor to help you understand how expensive it will be to hold a balance on a card.

Sometimes you will also see the terms MPR or DPR.

MPR is your monthly percentage rate and DPR means the Daily percentage rate. When you divide APR by 12, you get an average rate which is called MPR. Similarly, when you can calculate the DPR by dividing APR by 365.

The minimum dues are calculated on a monthly cycle so it is always a good idea to have in mind what is the effective MPR of a card.

There’s a little more to get your heard around….

Credit card companies offer a “grace period”. This is the period between the statement date and the due date. It is typically a 3 week period but it can vary on some cards.

What this means is that if the balance on the card is fully cleared before this grace period, there will be zero interest accrued which will shown in the next statement, and will increase the minimum due amount that is owed.

However, if a customer already is carrying a card balance from the previous statement period, then in most cases, the grace period does apply. Interest on the transactions starts getting charged from the moment of the transaction.

You can learn more about Credit Card terms at this link: The 9 terms you must know in all that Credit card mumbo jumbo!

So why is APR just so important?

To limit the costs of credit card debt, you have to be selective and avoid higher APR cards as much as possible.

Interest payments will show up down the line, as recurring monthly costs!

Before you get any credit card, keep in mind:

  1. The details of the APR will also help you understand what promotions are offered on the cards (e.g., 0% APR for the first 6 months).
  2. Lenders cannot change the APR for the first 12 months. Having said that, an APR can change in that period if it is a promotional or variable rate or if the terms and conditions are violated.
  3. You should review other terms and conditions also quite thoroughly. APR is the most important factor but there can be other gotchas.

Types of APR

  1. Purchase APR - The interest rate applied to credit card purchases.
  2. Balance transfer APR - The interest rate paid on transferring the balance on one credit card to another.
  3. Introductory APR (also called promotional APR) - Credit card companies offer lower APR (as low as 0% APR) for a limited time period (e..g, 6 months - 21 months). It can be for specific transactions as well as balance transfers, cash advances or any such combination.
  4. Cash advance APR - The cost of borrowing cash from your credit card will very often be higher. There may be a different APR for checks, or certain types of cash advance. Typically, no grace periods apply here.
  5. Penalty APR - Usually the highest APR. It may also be applied to certain balances when you violate the card terms and conditions such as failing to make payments on time.

Would you believe there are up to 6 different ways that a bank or card company can use your APR to calculate your interest? Most card companies use the ‘Average Daily Balance’ method, but other methods can also apply.

https://docs.google.com/spreadsheets/d/1YOzCTVMB1ihDQWo6nfe3yr_p13LEzLPN7TPCUGVKbdE/edit?usp=sharing

The Bottom line...

Before you apply for a credit card, read the offers, terms and conditions but also the APRs.The “APR” is important info if you are going to carry balances on this card. It can seem murky and complicated but be aware and you will spot a high APR.

The Bright app gives you the ability to see all your APRs in one place. It also helps your prioritize how you handle your credit cards so you pay more attention to the higher APRs ones which are more costly.

You can learn more about how Bright works to manage your credit cards.

Sources and other great references:

https://www.creditcards.com/credit-card-news/glossary/term-annual-percentage-rate-apr.php

https://bettermoneyhabits.bankofamerica.com/en/credit/what-is-apr

https://www.creditcards.com/credit-card-news/glossary/term-annual-percentage-rate-apr.php

Alex Seyfert
Head of Product and Co-Founder, Bright Money

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