Getting your first credit card is an exciting time. A lot of new options become available. You can for example rent a car abroad. You then however spot APR on each card you are looking to apply for. The next question you ask – what is the credit card APR and why do these percentages matter?
Some of the terminology can be slightly confusing I have to admit. However, once you understand this – it becomes a lot more simple.
I will explain in simple language what APR is. The below knowledge will make you equipped and ready for when you are due to apply for a card. This will allow you to pick the best card from the list you find.
what is credit card APR?
Let’s start with the basics. APR or annual percentage rate. When it comes to credit cards – this is a good starting point to compare a number of products on the offer. This gives you a quick and easy benchmark.
What APR is telling you – if you were to borrow £1,200 and pay back the amount over a year and were to include the purchase rate and the fixed annual fee, that’s how much it will cost you.
What APR does not include however are other variable fees you might have to pay. This could be late payment fees or payment protection insurance. APR will also exclude any fees that result due to you using card in any way different to regular purchases – e.g. cash withdrawals.
why is the rate I was offered is different to the advertised credit card APR?
When companies are claiming their APR they are not obliged to give this to everyone who applies. They will analyse each individual before offering him a product.
A company can only claim an APR if at least 51% of people actually get this rate. APR calculations do not include people who apply for a card but do not get it.
The other 49% of people using the specific card might actually have a higher APR. Technically, lower rates than advertised APR can exist for a credit card however you don’t see this happen often.
The lenders will use your credit report to determine how risky of a borrower you are. This is where having a good credit score can become extremely valuable. A good credit score can be a difference between the best rate the lender offers and the worst on the list.
If your credit score isn’t good enough – you might get rejected for the card you apply for altogether.
is APR how much the borrowing actually costs?
I see an issue with APR which you should be aware of as well. While it is a great measure of comparing multiple credit cards real quick to decide which one is cheaper, it doesn’t tell you how much the true borrowing might end up costing you.
As I mentioned before, things like usage fees, insurance and penalties are not included in the APR. What this means – that the true cost of borrowing will depend on how you use the card.
Firstly, if you clear you full statement each month – the only cost you will pay is the annual credit card fee. There are many cards that have no annual fee. This would mean that your actual cost would be nothing as long as you clear your balance in full each month.
On top of this – there are cards that offer you benefits. This will depend on the type of credit card you go for. This can be points, cashback or air miles as an example.
Next, the APR doesn’t help to see the full picture depending on how you use the card. If you withdraw money with your credit card – the fees linked to that are not part of APR. This also excludes any late payment penalties.
You will be the best person to know how you actually use the credit card you have. That’s were it might be worth also reading the small print to get a clearer picture of all the charges you might be paying.
what credit card APR is good?
There are 2 ways to look at it. If you are one of the people who regularly falls behind – the lower the APR the better. You should look into the value of other charges you pay as well. Anything below 20% APR is a decent offer in my view.
On the other hand if you use the credit card for the benefits it gives you – APR is an irrelevant metric altogether. It is good to get the one that charges you the least obviously just in case.
The more important thing to look at are the – annual product fee you will have to pay and the benefits you will be getting in return.
I have 2 credit cards myself. First one I got – Barclaycard. This has no annual product fee which makes it free of charge for me to use as long as I clear the balance monthly. In return I get points that can be exchanged for vouchers at many major retailers.
The second card I have – American Express. This gives me cashback. I have calculated – and the cashback I get is more valuable than the point offered with the first card. This is the reason I always try to use my Amex.
There are some retailers however who do not accept Amex. In order not to lose out on potential rewards while shopping there – I get my Barclays card out.
Little benefit is better than no benefit at all.
summary
At a glance – APR is a great metric to compare multiple credit cards you might consider. It is worth however reading the small print and considering all other fees you might get charged. Depending on how you use your credit card you should know which of the fees apply to you more than others.
If you clear your credit card regularly and do not pay any fees the story is different. The key here is to find the credit card that offers the most benefit to you.
Consider the annual product fee you will be charges and compare the amount of benefit you will get based on your annual spending estimate.
Some credit cards if used wisely can actually end up making you money rather than costing you even a penny.