✅What exactly is the credit card APR? How is it calculated? Should you pay attention to it and is it always a good idea to use the APR or should you sometimes ignore it when comparing credit products?
I’ll walk you through exactly how the APR (Annual Percentage Rate) works and the way it’s calculated (and note – the calculation is different in the UK to the US because EU legislation prescribes the use of compounded interest instead of simple daily interest that is used in the States).
I’ll also show how the APR can be misleading and sometimes not give the full picture, especially for credit cards that have annual or monthly fees.
Often products with these high fees also provide high value benefits and perks. As the APR does not account for the value of these benefits and simply calculates the total cost, the APR can be relatively meaningless for these products.
Lastly, I talk about the way the calculation is done. Credit card APRs are calculated assuming a £1,200 one-transaction drawdown followed by 12 equal monthly repayments to clear the balance in full. Basically it’s worked out as though it was a 1 year £1,200 loan which really is not the way anybody uses credit cards.
For this reason, if you use the credit card in other ways – borrowing for shorter or longer periods and having larger or smaller balances, the effective APR you will actually be paying may be very different to the one stipulated in the credit card advert.
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