What is the enigmatic Credit Card APR?

The two Ms that most humans love in their lives are “Mystery” and “Money”. And who better than bankers to combine both? Yes, there’s mystique on how money is made and revolved in the system. One such mystery floating in the credit cards space for decades is an abbreviation that most have heard of, but not many have unraveled yet, is “APR”.

So what is this APR?

If credit card holders do not pay their bills in full, they must pay interest on their outstanding balances. An Annual percentage rate (APR) simply refers to the interest charged on the money that’s owed for purchases made using the credit card. So simple yet hardly understood. Very few cardholders are aware of how APR is calculated or even what the current rate on their existing credit cards is.

Why should you bother about APR?

Anyone who uses a credit card should understand how “Annual Percentage Rate” (APR) works, when it’s applied, and how sound financial practices can help avoid or reduce your interest burden. And more importantly, you can benefit from the interest free credit period that credit cards offer you.

So let’s peel the onion and understand how is this APR levied

Interest is calculated on credit cards using the formula:

Credit card interest = [daily rate] x [total daily balance] x [number of days in billing cycle]

• Divide your credit card's transaction APR by 365 to get the daily rate. (Some banks use 360 days). If your annual percentage rate is 18%, your daily rate is .00049%.
• Add up your amounts at the conclusion of each day of the billing cycle and divide the total by the number of days in the billing cycle to get your average daily balance. This is your daily average balance.
• Next, multiply your daily interest by your daily average balance, and multiply that sum by the number of days in the billing cycle. Most issuers compound their interest daily.

Does everyone have to pay or is there a way to save?

No, you don’t need to pay any interest if you pay your outstanding balances in full and on time every month. You will also get a grace period within which you are supposed to repay the entire amount that you have taken from the bank. It is usually an 18-21-day period that begins at the conclusion of the billing cycle on the statement date. No interest charges will be incurred if you pay the full outstanding for the last billing cycle before the payment due date. The amount of interest you pay is determined by the APR of your card, the size of your balance, and the size of your monthly payment.

Is APR constant for all kinds of transactions?

APR has many forms, including:

Purchase APR

This is the interest rate that is charged on all purchases made with your card, whether they are done online or in person. Most Indian banks historically have been charging around 36% APR, irrespective of your age, income or credit standing.

IDFC FIRST Bank is the first Indian bank to introduce dynamic, personalized APR ranging starting from as low as 9% to a maximum of 36% per annum. Yes, you heard that right.

Cash advance APR

Cash advance APR is the annual percentage rate of interest that you have to pay for credit card cash advances. This rate might be equal to or greater than your purchase APR. Also most banks, do not include a grace period and interest starts getting charged from the day of cash withdrawal.

IDFC FIRST Bank on the other hand, charges 0 interest if you pay all your outstanding dues before the payment due date. Now, that’s unique isn’t it.

Penalty APR

This rate applies to payments that are late or returned, and can be higher than the regular APR. Before your credit card issuer removes the penalty APR, you may need to make multiple consecutive on-time payments. If you are over 60 days late on a payment, the penalty APR may be applied to your existing balance as well.

Now that we’re enlightened, what next?

Has the unraveling of the APR mystery changed how you view credit cards as a financial instrument? It’s like a double-edged knife. If used well, it can slice and dice all your expenses to your benefit.

Always pay your dues and time and carry forward partial balances only up to the amounts, which you can afford to pay interest on.

Preferably go with a low interest credit card, such as the ones issued by IDFC FIRST Bank. All our credit cards are packed with multiple benefits. The interest rate on the credit cards issued by IDFC FIRST Bank, as you may have noticed is transparent and low, making it affordable for everyone. Plus, we offer 10X rewards which make our cards super rewarding. On one end, you benefit from low APRs and the other, you earn lucrative reward points every time you swipe the card. Learn more about IDFC FIRST Bank instant credit card.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.