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How to Calculate Annual Percentage Rate for your Credit Card

If you own a credit card then knowing how to calculate annual percentage rate is a very good skill to learn. It will help you keep track of your finances and fees and help you to create certainty when it comes to your assets and money.

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Importance of understanding APR

Every time you purchase with a credit card, you are charged a certain fee in interest. This fee can be immediate or can take effect over a few months or a year, depending on the type of offer. The more you buy, the more interest is added to the amount you will have to be charged. That is why understanding your annual percentage rate (or APR) is so important. It will help you understand how much money you are being charged over and above your purchases. Being aware of this calculation process will help you understand exactly where your money is going and how to better manage your finances.

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How it is calculated

Your rates are charged depending on whether you have a fixed or variable rate for you credit card. If fixed, it remains the same over time while, variable differs depending on the current global rates and a small percentage added on by the bank you use. The fees you are charged also depend on your payment history and you current credit score. The process of calculation is usually involves you APR rate being divided by twelve for all the months of the year. This percentage amount is then multiplied by the amount owed by the purchases you have made. The amount that results is the fee you will be charged for the each month. This amount will be fixed for an entire billing cycle that was determined for your type of credit card.

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Different rates
This is a very simplistic example and enough for you to find out how to calculate annual percentage rate. The bank can adjust this amount depending on different factors and the options for you card scheme. These can include:

  • Combination: They can combine all interest rates for the entire year and ignore your fees to calculate what you are charged.
  • Purchases: The total amount you owe can be calculated by simply adding the original fee you were charged to the additional balanced created from purchases you have made.
Loan: The fees you are charge can be paid through a loan and this is then slowly paid back through the amount you are charged. This option is often used if you have made a necessary large purchase and do not want to be immediately being charge interest on it.

Keeping track of your spend

If you keep track of all the purchases you have made, calculating annual percentage rate is not very complicated. This amount will remain constant for a billing year but the bank you use can include their own factors to create an accurate number and this can affect the calculation and your APR rates.

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