What is APR?


If you have a credit card, it’s essential you take notice of your annual percentage rate (APR). If you have a high fixed or variable APR, it could have a direct impact on your personal finance situation. 

Let’s get to the following commonly asked questions: 

  • What is APR?
  • How is APR calculated?
  • How do you minimise your APR?
  • What is the impact of APR on your credit score?

What is APR?

APR is a way of expressing the cost of borrowing money, typically from loans, credit cards, or other lines of credit. It’s the total cost you’ll expect to pay when borrowing money over a year. APR includes the interest rate and the fees associated with the loan. 

Fixed and variable APRs

Typically, credit card companies will offer two types of APR: variable or fixed APR. Let’s explore both in detail. 

When opting for a fixed (credit card) APR, the interest rate remains unchanged throughout owning the credit card. This ensures the borrower's monthly payments remain steady, offering predictability and stability when paying your bill.

By selecting a fixed rate APR, borrowers are protected from any fluctuations in interest rates within the financial market. Regardless of any changes in market rates, their APR and monthly payments stay constant.

A variable APR changes depending on fluctuations in market interest rates or an index rate specified in your credit and debt agreement.

They typically begin with lower introductory rates compared to fixed-rate APRs, making them more appealing to borrowers in the short term. However, interest rates on the outstanding balance of your personal loan can rise over time if market interest rates increase. 

Important: It’s essential to factor in APR when you compare credit cards, as it will contribute to your loan rates and the amount you’ll pay in interest. Ignore the pull of a variable credit card with a low introductory APR - this will likely cost you more in the long term.

How APR is calculated

When borrowing money and taking out a line of credit, you should calculate your personal APR and any penalty APRs you may be subjected to. Your APR may be affected by your credit history and credit limit, so check the terms and conditions of your loan before proceeding. 

You can use this manual APR calculator to devise the amount of APR you’ll pay: 

APR (annual percentage rate)  = [(Total Loans Balance/ Loan Amount) / Loan Term] × (12 / Total Number of Payments) × 100

However, you can get your annual rate explained by your loan provider. 

Read more: How to refinance a personal loan?

How to minimise your APR

High APR rates on your existing balances can make it difficult to manage your debts, and you may be looking for an easy method for credit repair. Getting a lower APR is one way to reduce the stress of paying back loans, as you’ll pay back less and will be able to spread out your payments over a longer period. 

If you make late payments, it could reflect poorly on your credit reports, leading to a bad credit score. Here’s how to obtain a low APR on any new lines of credit. 

Shop around and compare APRs from different lenders

Before making the decision to borrow money or obtain a credit card, it is crucial to compare the Annual Percentage Rates (APRs) provided by various financial institutions. Different lenders may have their terms and rates, so it is advisable to invest time in evaluating all available choices. 

Get a loan with a shorter-term

Consider choosing a loan that has a shorter repayment period. Loans with shorter terms usually have lower total interest expenses over the life of the loan. Even though your monthly payments may be higher, you'll end up paying less in interest, helping you to get rid of debt sooner.

Make a down payment

When you're borrowing a lot of money with a home loan or car loan,  putting down a significant down payment can help lower the amount of loan you need. This may lead to more favourable annual percentage rates (APR). It's important to carefully evaluate your financial circumstances and decide if making a sizable down payment is the right choice for you.

Impact of APR on your credit score

The interest rate you are charged for loans and credit cards can impact your credit score. Let’s take a closer look at how a high APR can damage your credit profile and potentially lead to a debt cycle. 

How a high APR can affect your credit score

When you have a credit card or loan with a high Annual Percentage Rate (APR), it can have various impacts on your credit score:

1. Missed payments: High APRs often lead to larger minimum monthly payments. If you find it challenging to make these payments, it may result in late or missed payments, which can damage your credit score. You can set up a direct debit from your debit cards to counteract this. 

2. Credit card balances: Having credit card balances with high APRs can quickly accumulate if they are not paid off in full each month. This not only affects your credit utilisation but also increases the total debt reported to credit bureaus, potentially causing a decrease in your credit score. Try opening a balance transfer APR card to minimise the amount you pay. 

Read more: Tips for improving your credit score

Summing up

Your credit card APRs can have a significant effect on your credit scoring, especially if you’re plagued with high interest rates that eat away at your disposable income. If you’re paying high minimum monthly repayments, we recommend talking to your credit card provider or seeking financial advice. 

If you liked this article, check out the WeMoney blog, where we regularly post advice on managing your finances. Alternatively, read our related article, ‘How to set up a personal finance plan.’

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Disclaimer: The author is not a financial advisor, and the information provided is general in nature and was prepared for information purposes only. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for making an investment, financial or other decision. This information does not take into account your investment objectives, particular needs or financial situation.

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