What is APR in a Credit Card?

APR full form is the ‘Annual Percentage Rate’, which is the fees and interest rates charged by credit card issuers in various forms on an annual basis. 

APR rates are higher than the interest rates and are calculated in percentages. The pending amount after the billing period is recorded and based on its yearly average, APR rates are applied.

You may end up paying more credit holding charges if you do not have clear knowledge of APR. Thus one must know what APR is and the rates of each of the credit card issuers.

What Does APR Mean in Credit Cards?

APR (Annual percentage rate) is the total cost charged to the cardholder including interest, penalties, extra fees, and any other charges. APR is charged on seeking cash from a credit card, not paying EMIs on time, or not paying bills on time.

APR in financial terms refers to the annual charges or cost applicable to the cardholder for any outstanding amount, fees, or penalties that need to be paid by the card issuer in addition to the outstanding amount. APR is a percentage cost to the cardholder which can be fixed or variable. 

The variable annual percentage rate credit card issuer follows index rates and does not need to inform cardholders of the same. Whereas, fixed APR credit card issuers need to inform the credit card holders before changing APR rates in notice.

APR Categories in Credit Cards in India 

There are a range of APRs that are charged by different credit card holders such as - 

• Introductory: This is a part of promotional schemes, where less or zero APR rates are charged for some time to attract clients, and then regular rates are charged. 

• Purchase APR: This rate is the most common to occur. It includes unpaid amounts resulting from purchases made in a month, and penalties on that amount are charged.  

• Cash Advance APR: Withdrawing cash against a credit card, or having cash equivalent transactions results in this APR. The rates in this category are the highest. It is advised to have this as the last option for your needs.  

• Penalty APR: Penalty APR is charged on the unpaid amount or some returns and more. These charges are high and as per the issuer's terms and policies.

• Balance transfer APR: To attract clients, some issuers provide low APRs to transfer their dues from their accounts and charge APR for those. 

Which APR Rates are Considered Good?

Different credit card issuers charge different APR rates in the market, and thus a range between 10% to 15% is often considered good. Whereas an APR rate of 9.99% is preferred. The decision to set APR for the clients depends upon the credit score of the cardholder. 

If you have a higher credit or CIBIL score, then your APR rates will be low. In many cases, the change in the prime rates may cause your APR rates to change or get high as per the change in the government index. 

How to Calculate APR?

To avoid and manage APR on your credit card, you should know it's working. Based on this you can save more while using your credit card.

Daily Average Balance: The rates decided by the card issuer are divided by the number of days in the year, to get the rates for each day. This is essential to calculate the monthly interest rates.

Monthly Balance: The daily outstanding balance is aggregated and averaged out within several days in the billing cycle to get the monthly outstanding balance. 

Billing Cycle: The majority of the billing cycle ranges from 28 days to 31 days. You can know the billing cycle from the credit card agreement.

The interest rates aggregated daily are averaged to get the monthly interest rates. The formula to calculate the monthly interest rate is -

Monthly Interest Rates = Daily Average Balance * Monthly Balance * Billing Cycle

Annual APR: Such monthly average interest rates are aggregated and averaged till year-end, and the APR percentage is applied to that outstanding amount. 

Example

Let’s try to understand this better with an example -

APR Rate: 22%

Outstanding Balance: Rs. 1000

Billing Cycle: 30 days

Daily Rate: 22%/365 = 0.0006

Daily Average Balance: Rs.1,000 / every day / 30 = Rs.30,000 / 30 = Rs.1,000

Monthly Interest: 0.0006 X Rs.1,000 X 30 days = Rs.18

Yearly Interest: 22% applicable on outstanding amount i.e. 0.0006 X Rs.1,000 X 365 = Rs.219.

If the compounded interest is added daily on the outstanding amount then the APR charges at 22% at the end on the credit card would be Rs.1,221.40.  

How to Avoid Paying Credit Card APR?

There are some tips and tricks to save APR on your credit card. A few of them are mentioned below -

• Never leave the outstanding amount for purchase after the billing cycle.

• Look for credit cards that offer low APR rates, mainly from 10% to 15%.

• Consider the fixed and variable APR rate concept for maximum savings.

• Competitive advantage looks out for offers under introductory APR rates, balance transfer APR, and more.

APR can be very costly if the credit card is not managed properly. Underrating, its rates and its calculation can be very helpful in successful credit card management. 

You must know the types of APR and the rate; that each card issuer holds for each type of transaction. You must pay their outstanding amount on time and need to consider cash withdrawal against a credit card as the last option as it has the highest cost.