All of us have signed that dotted line to purchase something on credit or used our credit card to make a purchase, but do you really know what the average percentage rate is and how it will affect the overall price of your purchase? If not, you are not alone. Average percentage rate, most commonly referred to as APR, is the cost of credit a consumer will pay. In simplest terms it is a rate different from your note rate.
The APR is used to compare various loan offers. The Federal Truth in Lending Act requires all lenders to disclose the APR they are offering. Most people don’t give APR a second thought because it does not affect your monthly payments. Your payments are determined by your interest rate and the life of the loan. For most people, figuring out the APR is very confusing. You are not alone as the majority of mortgage brokers and lenders struggle with it as well. Credit card companies are no exception. Most APRs are linked to the WSJ Prime Lending Rate, published by the Wall Street Journal.
The purpose of the APR is to determine the true cost of a loan. It was designed to prevent lenders from hiding fees from the borrower. To make things even more complicated, lenders calculate the APR differently. This makes it hard to compare apples against apples.
To get around the different ways the APR is calculated, as the lender to provide you with a good faith estimate of costs on a set dollar amount with a set interest. For example, ask three credit card offers to give you a good faith estimate based on a balance of $10,000 at 5.25% interest. Next subtract any additional fees that might be added. This will give you basic figures to compare for all three credit card distributors.
Some credit card companies will not disclose the APR calculations to you. They are not trying to keep it secret, rather they use software to calculate the information for them and they really can’t tell you how the information was derived. It is wise to avoid credit card companies with these practices.
If you are able to pay off your credit card balance each month, you will never need to worry about APR. This is because you only pay it on the balance you owe. Likewise, the higher the balance you carry on your credit card the more APR affects you. Since APR affects your credit card balance and thus your disposable income, it is highly recommended that you work hard to understand exactly how it is calculated on the credit cards you use.