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APR: What It Is and How It Affects Your Credit Score

February 2, 2022

Learn more about one of the most important factors to consider when taking out a loan.

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APR is the annual percentage rate of interest that you pay on your credit card balance. APR is calculated by adding up all the interest charges and fees you paid over the course of a year and dividing it by your total balance.

The APR for a credit card varies from card to card, depending on factors such as the type of card, whether it’s a rewards or a low-interest card, and what kind of introductory offer it has.

How APR Affects Your Credit Score

APR is the interest rate that is charged for borrowing money. It’s important to know because APR affects your credit score and vice versa.

The APR that you pay on your credit card can be anywhere from 0% to 30%. The higher the APR, the higher the risk of defaulting on your debt. When you are applying for a loan, lenders will take into consideration your credit score and if they think it’s too low, they may deny you a loan or charge you more interest rates.

How APR affects your credit score is a complicated issue. The higher your APR, the more it will affect your credit score. On the other hand, if you have a good credit history and can afford to pay off your balance each month, then APR won’t have much of an effect on your credit score.

This is why it’s crucial to maintain a good credit score. FICO, the company that calculates credit scores, considers various factors when calculating your credit score. These factors include how much debt you have, your payment history and the types of credit you use. Maintaining a good credit score can save you money in interest rates when applying for loans or other services in the future.

If you have an outstanding balance on one card and transfer it to another card with a lower APR, this can help improve your credit score.

What is the Difference Between APR and Interest Rate?

In short:

APR is the annual interest rate, which is applied to the outstanding balance of a loan. It does not take into account monthly payments or any fees that may be charged.

Interest Rate is the total cost of borrowing money, which includes interest and other charges. It takes into account monthly payments and fees.

How to Calculate APR on a Loan

The APR is the annual percentage rate of the loan. It is calculated by dividing the total amount of interest paid on a loan by the total amount of money borrowed.

It is important to note that there are two different types of APR calculations. The first type, called “simple” APR, just takes into account the interest rates and time period without taking into account any other factors. The second type, called “fully amortized” APR, takes into account factors such as time periods and fees.

To calculate APR, you will need to know the annual interest rate and how often it compounds. The APR formula looks like this:

APR = (1+i)^n*100/i

where i = annual interest rate, n = number of times per year that interest compounds

If you want to know how much interest you’ll be charged, you’ll need three things: the average daily balance of your account, the number of days in your billing cycle, and the APR.

For example, if you have a travel rewards credit card with an average daily balance of $1,500 at the end of your 30-day billing cycle with a variable purchase APR of 15.99%

It’s easy to calculate your cost of interest (numbers are approximate):

  1. Divide your APR by the number of days in the year. 0.1599 / 365 = a 0.00044 daily periodic rate

  2. Multiply the daily periodic rate by your average daily balance. 0.00044 x $1,500 = $0.66

  3. Multiply this number by the number of days (30) in your billing cycle. $0.66 x 30 = $19.80 interest charged for this billing cycle

The math for the calculation requires some work, but the concept is simple: Carry a balance, and you’ll pay interest.

The Importance of Understanding APR

APR is important to understand because it is a measure of the true cost of borrowing and can help you compare loans and choose the best one for you.

The APR doesn’t include other charges, such as application fees, processing fees, or late payment penalties.

Some loans have an introductory period where interest rates are lower than they will be after the introductory period expires.

When you apply for a loan, ask about any introductory periods so that you’re aware of them before they expire.

How to get out of debt with high APR faster

Joola is a rotating savings and credit group app that allows users to save money, track their spending habits, share the responsibility of paying back debt, and build credit. The platform promotes saving while also capitalizing on peer pressure to motivate users to pay back their debts. Joola makes it easy for you to set up a new savings circle by linking your bank account and inviting friends or family members.

It is affordable, transparent, and easy to use. Additionally, the app also has a rewards system where you can earn cash bonuses for receiving the last payout position. Learn more about how it works here.