When you apply for a loan or a credit card, you’ll see two different numbers that signal how much it will cost you: the interest rate and the APR (or Annual Percentage Rate). They’re similar concepts with subtle differences in how they’re calculated.
Your interest rate is the interest charged by your lender for the money you’ve borrowed. This is the cost of the debt for you - and the rate of return for your lender.
“APR” is an acronym for “annual percentage rate.” It’s your annual cost for borrowing money from a financial institution. This includes your interest rate plus certain fees, such as:
Your APR can vary, depending on the loan type or the credit card issuer. But it’s always important: your APR is the all-inclusive cost of a loan or a credit card - and a more accurate indicator than the interest rate.
Step 1: Add total interest paid throughout the loan to any additional fees
Step 2: Divide by the amount of the loan
Step 3: Divide by the total number of days in the loan term
Step 4: Multiply by 365 to find the annual rate
Step 5: Multiply by 100 to convert the annual rate into a percentage
Your credit score will determine the APR lenders and card issuers can offer you. A healthy credit score will get you a low Annual Percentage Rate. A bad credit score will give you a high APR.
In ads and promotions for credit cards, you might see offers of 13.99% APR to 22.99% APR and higher. But the final number depends on your credit worthiness, calculated based on your credit score and other risk factors. The average APR for U.S. credit cards has ranged between 14% and 21.20% since early 2018.
The different APR's on credit cards.
Different kinds of APRs can be applied to your credit card account. Some are featured in promotions, others are hidden in fine print. Here are some of the important ones to note:
The TILA or Truth in Lending ACT passed in 1968 mandates that your lender disclose the APRs they’ll apply to your account before you sign an agreement.
The more you’re aware of the charges attached to loans and credit cards, the more sensibly you can use all that they offer.
Your personal Bright Plan can help you pay less in interest fees on your credit cards, automatically.
Once you’re connected to Bright, we’ll analyze all your debt and your spending habits, calculate how much you can afford to pay, and then make payments that save you more.
Month after month, Bright makes your payments for you, so you’re avoiding late fees - and always paying down your balance, lowering the interest you pay.
If you don’t have it yet, download the Bright app, connect your accounts, and with your personalized Bright Plan, start enjoying on-time payments automatically. It’s one of the best ways to boost your credit score, too.
Avinash is an Engineering graduate from IISc and BITS-Pilani. He is an experienced engineer and big data architect.