Understand how the "Annual Percentage Rate" works and how this impacts the way you pay on plastic.
A credit card's APR or annual percentage rate is used to calculate the amount of interest that is applied to your credit card balance. Australian credit cards usually represent the APR as a "per annum" figure, such as 17.99% p.a. or 19.99% p.a. These are the interest rates you typically see when you compare cards.
Credit card issuers are required to advise you of the annual percentage rate before you apply for a card. They must also outline the APR on your account summary and in the statements you receive. This is so that you can clearly understand the potential costs of carrying a balance on your card.
How does a credit card APR work?
When you carry a balance on your credit card, the interest is calculated daily and charged monthly (based on your statement period). The APR provides the basis for these calculations.
For example, let’s say you have a credit card that charges 20% p.a. To figure out the daily rate of interest, you would divide this APR by 365 (for the number of days in the year).
In this case, 20% divided by 365 is 0.055% (rounded to the nearest three decimal places). This is the rate of interest that would be charged for each day you carry a balance. The total cost of interest charges would then be reflected on your monthly statement.
What are the types of credit card APRs
Most credit cards come with several APRs that apply for different transactions. The most common are:
- Standard purchase rate. This is the rate of interest for new purchases made on your card. This APR could range from 10% p.a. to 22% p.a.
- Standard cash advance rate. This APR is applied for cash transactions such as ATM withdrawals, as well as gambling, foreign currency purchases and even some government charges and bill payments.
- Promotional balance transfer rate. A balance transfer may be offered at a low or 0% APR for an introductory period. For example, you could get a card that charges 0% p.a. on balance transfers for the first 12 months. After the introductory period is over, the balance transfer APR will revert to a higher standard rate.
- Promotional purchase rate. Some credit cards offer new cardholders a low or 0% interest rate on purchases during the introductory period. Similar to balance transfer offers, when these purchase rate promotions end, the APR reverts to the standard rate for that card.
It’s important to note that APRs vary significantly based on the card you choose. For example, a low rate credit card could provide a standard variable APR of 9.99% p.a., while a rewards credit card might charge 19.99% p.a. This is why it’s important to compare a range of cards and consider both the promotional and standard rates based on your circumstances.
What are the other factors to consider?
As well as looking at credit card APRs, make sure you consider the following elements and features when comparing different cards.
- Compounding interest. Credit card interest compounds over time. This means that not only will you be charged interest in your balance, but you could also be charged interest on your interest.
- Minimum payments. Credit card companies list a minimum payment amount on each statement you receive, usually between 2–3% of the closing balance. If you only pay this amount, it’s more likely you will pay interest on your interest and end up with years of debt.
- Annual fees. Most credit cards charge an annual fee when you open a new account, and on the anniversary for each year you hold the card. This cost adds to your balance, and also attracts interest charges at the purchase APR.
- Cash advances. When you use your card to make a cash advance transaction, you will be charged a cash advance fee that’s usually worth 2–4% of the total transaction cost. This is in addition to the cash advance APR, and adds to the interest you have to pay.
- Interest-free days. Most credit cards offer up to a certain number of interest-free days on purchases, such as “up to 55 days”. This feature means you can make interest-free purchases, as long as you pay your account balance in full by the statement due date. But if you carry a balance, the purchase rate will apply from the day each transaction was made, and you will have to pay off your account for two months in a row to take advantage of interest-free days again.
- Credit card perks. Credit cards that offer benefits such as reward programs or complimentary travel insurance often have higher APRs. If you’re interested in these features, make sure you consider the potential cost of interest charges and annual fees; the benefits you get should outweigh these charges.
While the APR plays an important role when it comes to managing or choosing a new credit card, it is not the only factor to consider. By comparing interest rates, introductory offers and other standard features, you can find a card that is affordable and convenient for you.
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