How Your Annual Percentage Rate is Calculated
The way your credit card’s annual percentage rate is calculated can be a matter of considerable confusion to some cardholders. We are going to take a look at how your credit card issuer arrives at the APR it charges you when you carry a balance from one billing cycle to the next.
As you know, when you carry a balance on your credit card you are being extended a line of credit and you are charged a certain rate of interest. Your annual percentage rate measures exactly what the credit extended to you is going to cost. It also gives you an idea of how expensive it will be to take on credit for that particular account.
For a detailed description of the formula that determines annual percentage rates (APR) and other pertinent information including grace periods and fees, we suggest you visit the Federal Reserve Board‘s web site for an in-depth explanation.
It is mandated by Federal law that credit card issuers must disclose the APR that they charge. Not only must credit card companies disclose their annual percentage rate but also the periodic rate. The periodic rate is the interest rate that is charged on the current account balance during the issuer’s billing cycle, which typically runs from 25-30 days.
While some credit card issuers charge a fixed rate of interest on outstanding balances, most use variable rates. Variable rates allow the credit card issuer to charge just about whatever they want (up to a government mandated ceiling of 30%). Variable rates are often raised and lowered as the Federal Reserve adjusts the prime rate. The prime rate is the interest rate that banks charge each other for loans.
You should always be aware of the APR of any credit card before you apply. Carefully read the disclosure statement to familiarize yourself with the terms and conditions set forth by the credit card company before you submit an application for credit.
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