Student Credit Cards
What is APR (Annual Percentage Rate)
Put simply, an Annual Percentage Rate (APR) is a measure of how much your credit will cost you, expressed as a percentage. APR is very often expressed as a total percentage (such as "5.99% APR Introductory Rate"), but in the fine print of your credit card disclosures, you will find what your APR is linked to. Most APRs are linked to the WSJ Prime Lending Rate, published by the Wall Street Journal. When this rate changes, your credit card rate is not far behind -- especially if it goes up. Remember, credit cards are different from federal student loans and private student loans, but the rate calculations are similar.
Remember that a credit card is a loan, and as such, interest is assessed on any money in the loan you don't pay back within your grace period. The interest is calculated based on your balance. Here's how it works.
Average Daily Balance computes your interest rate based on an average of each day's balance in a month. Say you buy $200 of stuff on January 15. To figure out your bill, add together all the daily balances of the billing cycle and dividing the sum total by the number of days within that cycle.
- So, January 1 - 14, you had a daily balance of $0.
- January 15 - 31, you had a balance of $200.
- For 16 days, you had a balance of $200, or a total balance of $3,200.
- Divide this by 31, the number of days in January.
- Your average daily balance is: $103.23
Read our popular blog post
"Who Cares About APR?"
The formula for computing your overall interest is as follows:
(Average Daily Balance x APR x Number of Days in Billing Cycle) ÷ 365
So, if you're in an introductory period of 7.99%, your interest (also called a finance charge) is:
$103.23 + (($103.23 x 7.99% x 31)/365) = $103.93 = the money you owe
Thus, next month, assuming you buy nothing, your loan amount owed will be $103.93.
Too complicated to try and track every purchase you make? APR only comes into play if you carry a balance. Pay your bill each month in full and on time, and you'll never have to worry about APR.
If, however, you can't pay your bill in full by the time it's due, you now know how to reduce your monthly bills - make more frequent, smaller payments to reduce your average daily balances. Take a look at our popular blog post Who Cares About APR for more!