Understanding APR

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What is APR?

Understanding APR

Credit card offers use interest rates as deal-closers, and consumers are proud when they get a below-average rate quote. When you review credit card offers, you may find the interest rate of the card referred to as APR. APR stands for annual percentage rate, which sounds like the interest is multiplied by your balance once per year. It would be nice if this were actually the case, but unfortunately, it's not.

In order to apply your APR, your interest rate is divided by 365 and broken down into a daily rate. This daily rate is then applied to your balance each day. For instance, if your credit card has an APR (or interest rate) of 15% and you divide that by 365, you get a daily rate of .04%. This seems like a nominal rate, but if you consider the fact that it's applied every day, added to your balance, and then charged additional interest the next day, you can see where the balance can really add up.



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