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How to Calculate Annual Percentage Rate or APR to Choose the Cheapest Credit Card
Credit cards are now becoming a necessity for majority of us. We need credit cards to finance our various needs like a new gadget, new car or an exotic overseas vacation. Considering how important credit cards are to us, we need to understand some basic concepts, such as how to calculate annual percentage rate, in order to get a fair deal every time we compare offers from different credit card companies. Choose the right credit card at DontSpendMore.com
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What is Annual Percentage Rate?
Before we go any further in learning how to calculate annual percentage rate, we need to first understand what it means. Annual percentage rate is also commonly referred to by its acronym APR or as nominal APR and is the easiest way to understand your loan/ credit amount and assess its cost in terms of a percentage.
For example a nominal APR of 10 % means that you will be charged $ 10 per year as interest for every $100 credit availed. Nominal APR only includes the simple interest rate for 1 year.
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What is Effective Annual Percentage Rate?
You now know what a nominal APR means. But if you thought that you now know everything about how to calculate annual percentage rate, then you are mistaken. Let me tell you why. Banks and credit card companies do not use the nominal APR when they calculate the charges that you need to pay each year. They use something called as effective annual percentage rate often referred to as EAR.
How to Calculate Annual Percentage Rate That Equals Effective APR?
There are 3 different methods to calculate the effective APR and depending upon the jurisdiction, any of the 3 methods may be used by your bank, credit card company or lender.
- Calculating the compound interest rates for the loan amount for each year, without adding any fees
- Adding the origination fees to the loan amount and then calculating compound rates of interest for the sum
- Origination fees are considered as a short term loan, which is due for payment first. The initial payment(s) are used to pay this loan. The remaining balance is considered as a 2nd long term loan.
How to Calculate Annual Percentage Rate in the Most Expedient Manner?
If all this seems too overwhelming for you, why not take an easier route to calculating APR? Thankfully, there are several online calculators available for free. You can use any one of them to calculate your APR easily and quickly. You simply need to input your credit amount, tenure, rate of interest and total charges involved and voila your APR will be displayed at the click of a button.
Synopsis
Always calculate your APR before you choose between 2 credit card options. It makes sense to go with the one that offers the lowest APR. Now that you have mastered how to calculate annual percentage rate, I wish you good luck in choosing the most economically viable credit card!| Thank you for visiting us. Do consider visiting DontSpendMore.com to compare and save on credit cards, cell phones, loans, long distance, mortgages, Internet access, and more. |
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