Basic Credit Card Annual Percentage Rate

One of the most basic credit card stuff you need to understand is annual percentage rate. This is not just the nominal interest rate. Interest rates are what you are charged for purchases and cash advances.

However, the annual percentage rate (APR)includes annual fees, late fees, over the limit fees, and any other fees the credit card companies charge. All these charges are just a form of interest, so when you add these fees in as interest the APR increases dramatically. All fees are a cost of borrowing credit. Once you pay any fee, the APR increases accordingly.

Wikipedia:

There are at least three ways of computing effective APR:

* by compounding the interest rate for each year, without considering fees;

* origination fees are added to the balance due, and the total amount is treated as the basis for computing compound interest;

* the origination fees are amortized as a short-term loan. This loan is due in the first payment(s), and the unpaid balance is amortized as a second long-term loan. The extra first payment(s) is dedicated to primarily paying origination fees and interest charges on that portion.

For example, consider a $100 loan which must be repaid after one month, at 5% interest, plus a $10 fee. If the fee is neglected, this loan has a (year-long) effective APR of approximately 79% (1.05^12 =~1.7958). If the $10 fee were considered, the interest increases by 10% ($10/$100) for the month, with the effective APR being approximately 435% (1.15^12 =~5.3502, as 535%-100%=435%). Hence there are at least two possible "effective APRs": 79% and 435%.