The Difference between APR and Interest Rates

The Difference between APR and Interest Rates

When credit card companies advertise, they often quote the APR or annual percentage rate of each card. Sometimes though, you will see introductory offers quoting zero percent APR or zero percent interest for balance transfer or purchases, for the first several months. People often take it for granted that this means the same thing, although the truth is that the terms interest rates and APR are different.

The term interest rate refers simply to the simple interest you will be paying for the money you borrow on your credit. The interest is calculated based simply on the interest rate and the amount of money or principal borrowed. This means that if you buy something for 200 using your credit card and the interest rate for purchases is 1.5 % per month, then if you will be paying 2 in interest. Of course, this interest compounds each month if you do not pay your bills on time.

When it comes to APR, the computation involved more factors, including the interest rate. The reason why APR is often confused with interest rates is that your APR is actually based on the interest. However, aside from the interest rate, all the other regular charges and fees that you will be paying on your credit card for the entire year is factored into the computation for APR. This includes fees such as annual fees and taxes. What this means is that while the listed APR is always larger than the interest rate, the APR is actually a better measure of the actual cost of borrowing money on your credit card per annum. This is because while interest rates on one card may be lower than another, if the fees on the second card are steeper, the APR will be able to show you which card will allow you to borrow money at a lower rate each year.

Credit cards UK companies offer all use the same method of computing the APR. However, in some countries, like the USA, APR is computed a different way. This means that to know if the listed APRs of credit cards are comparable, you need to know how the APR is computed in the country where it is issued. All countries belonging to the European Union also use the same computation for APR so that it shouldn't be an issue for you if you move anywhere in the EU member states and decide to apply for a credit card.

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