Personal Finance Basics – Do You Know What APR Means?
Have you looked at the ads for credit cards? If you have with even minimal attention you will know that one of the most prominent things they display is the APR, or the credit card rate. Lots of people simply choose the card with the lowest APR rate, which is a good first step. It is correct that the APR of your credit card is one of the most important factors you should consider when choosing your card (although it is not the only one). So, if you do not understand the APR you really should start improving your personal finance basics by gaining a proper understanding of them.
The APR on your credit card is the rate if interest your supplier will charge you on the amount you owe them. So obviously, the lower the APR, the lower your payments, unless you pay off your card in full each month. If you do clear your card monthly, the APR will not be as important as it is to those who do not clear their cards each month.
Each month your card supplier will send you a bill stating the full amount you owe them and the minimum payment you must pay by the due date. If you do not meet this date you will be charged a late fee and perhaps other penalties depending on the terms and conditions of your supplier.
So you can pay the minimum amount specified, or the whole amount, or any amount in between. The important thing to understand is you will NOT be charged any interest if you make full payment.
But, if you do not pay off the whole amount, you will pay interest charges on the amount left. This interest will be added to your next bill. The interest you will be charged is that you agreed to when you signed up for your card. And compared to, say, a bank loan, the interest, or APR, is very high.
So it is possible to start a spiral of debt in this way if you do not know how these things work. Always borrowing on your card without paying it off each month will accrue high interest charges which you will have to pay eventually.
Do not misunderstand me here. I am not saying you should never use your card if you cannot pay it off in full at the end on the month. I am saying your personal finance basics should be good enough to inform you when you can do this and when you should look for another source of funds.