What is APR and how does it work?

APR or Annual Percentage Rate is a standardised way to show the cost of borrowing over a 12 month period. But it’s important to note that an APR doesn’t include all charges.

What is APR?

APR or Annual Percentage Rate is a method of calculating the interest rate and any other charges that are applied (such as an annual fee) to financial products such as credit cards or personal loans.

APR shows the amount of interest you’ll pay annual - it’s a standardised way to show the cost of borrowing over a 12 month period. It’s standardisation comes from the fact it’s calculated using a formula set out in the Consumer Credit Act (1971) and as such, all lenders have to follow it.

When comparing credit cards, it’s therefore important to look at the APR of each product and compare the total amount you can expect to pay back.

It’s also important to note that an APR doesn’t include all charges, some charges such as payment protection which are not compulsory, are not included within the APR. If you already have a line of credit, or you’re applying for a credit card, you’ll have to check the full terms and conditions to know if there are any other charges you should be aware of.

Speaking of charges not included in the APR, any fines for exceeding your credit limit or late payments are not included.


Why do search results show a ‘representative APR’?

A representative APR is the rate offered by the lender, for that product, to at least 51% of customers. Meaning a representative APR is not the guaranteed rate and almost half of the people who apply for the product could end up paying a higher APR.


Can you use APR to calculate how much you’ll pay?

When it comes to credit cards it’s more complicated. Because credit cards have flexible repayments, meaning you can pay back differing amounts every month (make sure you’re paying the minimum amount at least), and lenders typically calculate interest on a monthly or daily basis it makes it more difficult for you to calculate. This is because the amount of interest you’ll end up paying within a 12 month period (annually) is dependent on how much your credit card balance fluctuates.

For instance, by repaying your credit card balance on time and in full every month, you won’t pay any interest - no matter what your APR is.
So, when comparing credit cards, APR can be useful. Just remember the amount of interest you’ll end up paying depends on when and how you pay off your debt.


What is a ‘personal APR’?

A personal APR is the actual rate you’re given. It may well be the same as the representative APR or it may be higher, it all depends on your eligibility. Lenders typically decide what APR to offer based on the credit and financial information of the applicant and how it matches their lending criteria.


How do you know if an APR is a good APR?

For credit cards APRs typically vary, they can be as low as 5% or as high (or higher than) 30%. Keep in mind that the APR you’re offered will likely depend on your credit score - how high or how low it is.

For balance transfer and 0% purchase credit cards they often have a promotional 0% APR period which can last anywhere between three to 40 months. If you have a credit card, or are looking at a credit card, with a promotional 0% APR period it’s vital that you’re aware of and stick to the terms and conditions or you risk losing the promotional rate early.

Keep in mind too, that you should aim to clear your balance before the promotional rate ends or you’ll typically be moved onto your lender's standard variable rate. If you’ve not yet cleared the balance on your credit card, and you’re unlikely too before the promotional period ends, you could look to apply for a new balance transfer credit card in order to move your existing balance onto it.

Monva can help you in your search for a new 0% purchase or balance transfer credit card. We can also compare credit cards for those with bad credit.

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