While getting a credit card, it is essential to know the APR charged by the bank to maintain your financial health. Furthermore, it gives you an estimate of the extra charges you may pay after a missed credit card payment. I will help you understand APR and how does credit card issuer calculates it.
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What is 24% APR on a Credit Card
APR stands for Annual Percentage Rate. It shows that the expected interest rate charged by the bank or credit card issuer on your borrowed money over 12 months. Although you receive a credit card with a fixed APR, you will have to pay only for the outstanding amount that was not paid after the payment due date of the billing cycle. There is a gap of around 20 days within the statement issue date and payment date. It called the grace period, and only the remaining amount after the grace period is subject to APR.
Assume, you have bought an iPhone on May 13, and your credit card statement issue date is May 22. In normal circumstances you will have until June 12 to pay the outstanding amount of iPhone, in case you are unable to make the borrowed payment by June 12, all outstanding amount on credit will be subject to APR. However, if you pay off your dues before or till June 12, no APR will be applied on your credit card.
24% APR on a credit card simply means you will be charged a 2% (24/12) monthly interest on the outstanding balance of your credit card.
Calculation of interest according to 24% APR
For instance, you have bought a pair of shoes for $100 on May 3, and your pay off date is June 13. However, you did not manage to pay the outstanding amount of $100 by the due date. The outstanding amount of $100 will be subject to APR, and the next credit card statement will include the accumulated interest on the outstanding amount of the prior month, i.e., $100 in this scenario.
According to 24% APR, you will be charged a 2% monthly interest rate on your outstanding amount. In this example, the outstanding amount is $100, and the monthly interest rate is 2%. Hence one-month interest occurred on outstanding of $100 would be $100*2%= $2.
It means you will pay an additional $2 on an outstanding balance of $100 with an APR of 24%.
FAQs
What is APR, and what does it stand for?
APR stands for Annual Percentage Rate. It is an annual rate charged on outstanding balances on the credit card. The total percentage represents the actual yearly cost that may apply to the borrowed funds.
How do you calculate the APR on loan?
Any type of loan has a specific APR. In order to find the actual monthly interest on the loan, divide the APR by 12, for instance, if APR on loan is 26%, the monthly interest rate would be 26/2 = 3%.
What does 48% APR mean?
A 48% APR means that the annual interest rate would be 48%, and the monthly interest rate would be 4%.
What does 0% APR mean?
Some of the credit card companies offer 0% APR for a specific time period for new customers. The 0% APR means you will not be subject to any interest on balances till the offer period that usually last for six months.
How do you avoid paying interest on a credit card?
Credit cards usually come with a comparatively higher APR that shows a higher rate of interest on the outstanding amount. In order to avoid paying interest on a credit card, wisely manage your monthly budget and, most importantly, ensure to make the payment of dues within the grace period or until the due date. You may set a reminder for payment due date to avoid missing a payment and unwanted occurrence of interest.
What are the differences between APR and Interest Rate?
APR and interest rates are widely used interchangeably, but they are not technically the same. While the interest rate simply shows the expected interest rate that outstanding balance attracts, the APA includes all other fees such as annual fees or upfront fees along with the interest rate.