By Deborah Ziff
When you apply for a loan or a credit card, the cost of borrowing and repaying over time is expressed as the Annual Percentage Rate, or APR.
It's a key term a consumer can consider when choosing a lender.
When comparing credit [offers], you should always compare the annual percentage rates, or the APRs, says Jesse Stockwell, managing partner at SuperMoney, a financial products and services comparison website.
That's the greatest way, generally speaking, to see what is going to cost you the least and what is going to cost you the most.
Here are six things to know about APR.
When people think of the APR, they automatically just think, 'Oh it's the same thing as the interest rate,' says Beverly Harzog, credit card expert and author of
The Debt Escape Plan.
That's often not the case, she says, as the APR is intended to represent the cost of borrowing. For some loans and mortgages, for example, the APR will include costs and fees associated with a loan, such as points, origination fees, and appraisal fees.
Credit card APRs, on the other hand, do not factor in annual fees or other fees. APR is simply the cost of interest, compounded annually.
With mortgage fees, the APR and the actual interest rate can vary tremendously, where it's a little less so with a credit card, Stockwell says.
Credit card issuers are required to comply with federal law that offers protections to consumers. For example, credit card issuers are not allowed to increase your rate within the first year of obtaining your new card, but there are some exceptions. For example, if you're over 60 days late on making a minimum payment, your issuer may have the right to raise your rate, even if you took advantage of a 0 percent APR promotion.
Say you're 60 days late on a credit card, your penalty APR can shoot up over 29 percent, Stockwell says.
It can stay that way for quite a while.
The best advice I can give is always try to make that minimum payment, no matter what, if you don't want to worry about a major problem with your APR.
It's generally best to pay attention to advertised APRs when you're shopping for a new credit card, but if you're going to attempt to negotiate a better APR with your current issuer, make sure you have a strategy.
It's not like you can just click a button on a website and [your credit card issuer] will give you a lower APR, Stockwell says.
Make sure you go in with some ammunition. Make sure you actually have some offers you've been pre‐qualified for, or proof you can get a lower interest rate.
Talk about how long you've been with your card issuer and what a great payment history you have, he added, and be persistent. If the frontline customer service agent can't help you, try his or her supervisor, or ask for the retention department.
If you're carrying a credit card balance with a high APR, then you may be able take advantage of a 0 percent introductory APR balance transfer offer from another credit card. Use the introductory rate time period – often anywhere from 12 to 21 months – to try to pay off your debt. But remember, when deciding whether to use a balance transfer, weigh the costs, such as fees, associated with balance transfer offers.
This is a golden opportunity to pay off your debt interest-free, Harzog says. But be careful, because if your intro rate ends and you still have debt, you'll be responsible for interest payments.
You can have a different APR for a prior balance, new purchases, and cash advances.
For example, a credit card issuer may be able to raise your interest rate if you are given 45 days' notice, but that may only apply to new purchases, Stockwell says, not your outstanding balance. Or, if you have a 0 percent intro rate on purchases but you take out a cash advance, you may pay the cash advance APR instead of the regular or promotional APR.
If you'd rather not think about the cost of borrowing using your credit card at all, then consider paying off your statement balance in full each month.
In most cases,
with credit cards, pay your bill in full and on time, and then your APR doesn't even matter, Harzog says. Many credit card issuers give cardholders a grace period during which interest is not owed if the statement balance is paid in full by the due date.
The best way to learn how APR affects you is to read your terms and conditions, noting the differences between transactions, and making sure to pay your bill on time – since late fees will make the cost of credit card borrowing even greater.
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