Suppose a card has an APR of 24% and the cardholder has an unpaid amount of $600, then the credit card will be loaded with an additional amount of $12. This is because the incidence of interest works out at 2% per month, and 2% of $600 is equal to $12. Therefore, this is the amount of interest charged on the outstanding balance carried forward to the following month by the cardholder. This APR may vary with reference to the nature of purchases made as well as the volume and frequency of purchases.
This feature of APR is expressed as a percentage and conventionally describes the additional incidence of the obligation of payment of interest by the cardholder for not paying his entire dues. This monetary charge has two definitions. One is the nominal rate and the other is the effective APR. The nominal rate is arrived at by multiplying the number of periods of payment with the rate charged for that period of payment in a specific year. It is simply the interest rate charged as a percentage annually, whilst the effective rate is the interest rate compounded and is inclusive of fixed fees.
There are a myriad of factors that affect the APR, the most predominant is the credit rating of the cardholder. The financial scenario and the prevailing rate of interest in the market will also influence at what level the APR will be charged by the credit card company. There is always a modification and correction made to the Federal Reserve rate, along with the prime rate so as to keep inflation in control and to boost the economy by encouraging borrowing.
Volatility of APR
As a consequence to these corrections, credit cards with low APR today may not enjoy the same low level in years to come. The bleak state of the economy and volatility in the credit scenario warrants even low APR credit cards to have a rate range of 8% to 12% per year. Rare will be the occasion when the credit card will be offered at a lower APR. Today there are companies offering 0% APR but this rate is only for a fixed period of time and on expiry of this period the rate will be hiked up to the usual 20% plus level.
Benefit of high credit rating
Generally, individuals who enjoy a high credit rating will be offered credit cards with a low APR due to a lesser risk of default on payments by that individual. Since the individual enjoys an excellent history of credit, the company issuing the card will find him a safe bet for payment of his dues and may offer him a card with 0% APR or a low APR card. There may be a vast fluctuation in the variables applied for APR calculation which may even reach 50%, meaning that one card may have 0% APR whilst another has 50% APR.
Only balance affected
An important aspect of this APR is that the interest is calculated only on the balance amount carried forward from the previous month, and is not applicable for any new purchases made during the current month. That is unless the balance amount is left unpaid and carried forward to the subsequent month. Due to any unavoidable financial constraints, an individual may pay the minimum amount required in the current month and keep a certain amount as the balance. Then that balance amount will be liable for the APR charges. But any new purchases made within the credit limits enjoyed by him during the next month will not have this APR levied.
With a low APR credit card you can enjoy festival shopping, vacationing to exotic places, or making a purchase involving substantial amounts of money. Such a card will help you to spread out your payments over a period of time with 0% to low interest being charged. These low APR cards can also be effectively used to transfer balances to other credit cards, which may have a higher APR associated with them. Thus, you can save the difference in the interest rates and profit. Introductory offers may range from 0% to a mere 4% for a period of six months to even a year. And even after the expiry of this initial offer, the APR will be low up to a maximum of 15.99%. The introductory rate offered may even cover purchases as well as balance transfers.