Understanding APR In Credit Cards & The Importance Of Paying The Minimum Amount Due
Credit cards are an essential tool for many people when it comes to making purchases and managing finances. They offer convenience and flexibility, but they also come with important terms and conditions that must be understood to avoid potential problems down the line. One of the most important terms to understand is the annual percentage rate (APR), which can have a significant impact on the cost of using a credit card. In this article, we’ll discuss what APR is, how it affects your credit card use, and why it’s important to pay the minimum amount due.
What is APR in Credit Cards?
APR, or annual percentage rate, is the interest rate that is charged on the balance you carry on your credit card. This rate is expressed as a percentage and is applied annually to your outstanding balance. The APR can vary depending on the card issuer, your credit score, and other factors.
It’s important to note that APR is not the same as the annual fee, which is a fee that some credit cards charge for the privilege of using the card. The annual fee is a fixed amount that is charged once a year, while the APR in credit card is an ongoing interest rate that is charged on your balance each month.
How Does APR Affect Your Credit Card Use?
The APR on your credit card can have a significant impact on the cost of using the card. If you carry a balance on your card from month to month, you will be charged interest on that balance. The higher the APR, the more interest you will pay over time.
For example, let’s say you have a credit card with an APR of 18% and a balance of $1,000. If you only make the minimum payment each month, it will take you over six years to pay off the balance, and you’ll end up paying over $1,400 in interest alone.
On the other hand, if you have a credit card with an APR of 12% and the same $1,000 balance, it will take you just over five years to pay off the balance, and you’ll end up paying around $700 in interest.
Why It’s Important to Pay the Minimum Amount Due
When you receive your credit card statement, you’ll see the minimum amount due. This is the smallest amount you can pay to keep your account in good standing. If you don’t pay at least the minimum amount due, you may be charged a late fee, and your account may be reported as delinquent to the credit bureaus, which can negatively impact your credit score.
While paying the minimum amount due can help you avoid fees and negative credit reporting, it’s important to remember that it’s not enough to pay off your balance in a reasonable amount of time. If you only pay the minimum amount due each month, you’ll end up paying a lot more in interest over time, as we discussed earlier.
Instead, try to pay as much as you can each month, ideally the full balance. This will help you avoid accumulating debt and paying more in interest over time.
APR is an important factor to consider when using a credit card, as it can have a significant impact on the cost of using the card. It’s important to understand what APR is, how it affects your credit card use, and why it’s important to pay the minimum amount due in credit card. By keeping these factors in mind, you can use your credit card responsibly and avoid potential problems down the line.