Credits are needed by almost every American, be it to solve the problems that have arisen, to make large or not so much purchases. With any type of loan you will have to pay the lender also an annual interest rate, in addition to the basic amount of the loan. Many have heard about interest rates, but not everyone knows how APR works and therefore can handle credit cards and other loans incorrectly, increasing debts.
Many borrowers see credit cards as easy money, almost like bonus free money. Such an erroneous approach distorts the perception of such a credit product, which often leads to a rapid increase in debt and further financial difficulties. This happens very often, despite the fact that credit cards are owned by hundreds of millions of Americans.
In order not to fall into a similar unpleasant situation, it is worth understanding how APR works and why it is worth taking credit card with full responsibility. Find out what the APR rate is and why most credit card holders subsequently have large debts.
More about APR
The abbreviation APR stands for annual percentage rate. Every time you take a loan or register a credit card, you agree to pay the lender a percentage of the loan amount for using its money.
The interest rate provides a profit to the lender, as well as compensation for its risks. The lender, giving out the money to any borrower, always risks them to a greater or lesser extent. The more risky a loan is, the higher the interest rate will be set.
When answering the question of how APR works, it is necessary to mention that this percentage the borrower will pay in addition to the refundable money that he borrowed from the company as well as to other fees provided for in the contract with the lender.
The amount of interest you pay in excess of the borrowed money will depend not only on the APR level, but also on the duration of the debt, the longer the loan term, the more you will overpay for its use.
In the case of the borrower’s lending, the creditor acts as an investor, therefore the interest rate on the loan for him will be the rate of profit and return on his investment. This understanding will allow to learn how APR works.
There are different types of interest rates that can vary depending on the terms of the loan. In addition, the interest rate may be revised by the lender when the circumstances change, either his or yours, as well as your request for such a change.
Periodic interest rates are calculated each payment period and may have a different value, depending on the balance of your debt. Variable interest rates may also rely on the size of your debt or on other conditions, for example, when during a certain period of using a credit card, the interest rate may be low or even zero, but then it becomes quite high.
Fixed interest rates remain at the same level during the whole period of using the credit, but they are practically not applied in credit cards. They are most often used for installment loans that have a specific fixed amount and a limited duration.
Formation of interest rates
The value of loan interest rates for a particular borrower is influenced by many factors, including global economic ones. The state of the economy, both in the country and in the world, will affect the base interest rate on loans.
As economic conditions deteriorate, interest rates rise, making loans less affordable for many Americans, but for a particular borrower, APR will depend primarily on its reliability and creditworthiness. A high credit rating and a good credit history will allow you to receive offers from lenders with the lowest annual interest rates.
In turn, bad credit makes the already high interest rates even higher, and this greatly complicates both the ability to get credit approval and the payment of debt, which causes a chain reaction. Such cases adversely affect the credit rating and make a bad credit history, causing even worse conditions.
The credit history together with the credit score starts to deteriorate, when you cannot pay your obligations on time, your debt starts to grow even faster. Moreover, it starts with the fact that your credit card balance increases, lowering your credit rating and causing an avalanche deterioration in all of your credit indicators.
Credit card balance shows the ratio of credit to debt and when this ratio increases your creditworthiness falls. As a result, with any type of loan, an increasing part of your monthly payment will go towards repayment of the creditor’s interest and ever less to repay the base amount of the loan. Thus, either your loan repayment period will increase all the time, or you will have to make increasing monthly payments each time, which is available to a few US citizens.
In addition to these unpleasant consequences, you will have to pay additional fees and penalties if you do not fully repay your financial obligations or you skip the regular payments. These penalties for credit cards usually have the highest percentages, which can reach almost 30% of the amount of your debt. So the situation with debts will grow like a snowball rolling from the mountain if you don’t find a way to avoid it and pay off the debt in time.
Almost all credit cards have a variable annual interest rate, which changes daily, depending on the size of the debt. This makes it difficult to adequately and accurately calculate your debt.
On the other hand, the contract with the issuer of the credit card must necessarily describe the method of calculating the annual interest rate, so you should carefully study it before signing the contract.
Other types of credit card interest rates typically include advanced money, purchases and balance transfers from other credit cards. These interest rates also tend to change depending on the circumstances.
For example, when you cash money from a credit card, you are immediately charged a fixed percentage, and when shopping with a credit card, the interest rate will depend on the amount of your debt.
The interest rate when transferring a balance from another credit card often has very low values for attracting new customers, but this happens only during a certain initial period, after which it significantly increases. These features explain how APR works and what can be done about it.
Is it possible to somehow reduce the credit card APR?
The interest rate is what credit companies do their business on and also compensates for their risks. That is why the APR will always be present in loans and credit cards, but almost every borrower can lower interest rate for himself if some efforts are made to this. This will save a lot of money on paying debts and prevent them from falling into big debt.
You can use several different options to minimize the annual interest rate that is available to most Americans.
First of all, use the initial offers of lenders with attractive rates and other conditions. Most companies are ready to offer favorable conditions for new customers, since attracting each new customer costs them dearly in a highly competitive environment.
Regardless of whether you already have a credit card or not, you can always find an offer with very low interest rates, up to 0% for a while. During this time, you can pay your old debt or make purchases without paying interest to the creditor.
With a valid credit card, you can lower your APR by reducing your balance and total debt. This most often automatically reduces the variable interest rate depending on the debt balance. In addition, it will positively affect the credit score, after which you will have a weighty argument in negotiations with the issuer.
What is a grace period on a credit card?
Most credit card companies offer a specific set period for debt repayment when each cardholder can avoid paying an interest rate. Most often, this is a period of up to 60 days, when you can pay off the debt without interest.
It is worth using such a great opportunity to prevent an increase in debt. For you need to carefully control your credit card expenses, which prevent costs that you cannot afford to pay during the grace period.
Discipline will allow you to avoid having to pay high interest rates for using a credit line, which average around 18% per annum, and will also help you save a lot on interest each year.
In the final
Interest rate or APR has a significant effect on how your debt will increase. This is the main factor that can ruin your life if you can not cope with your debts.
However, there are opportunities for reducing APR and successfully managing your debt. When you already understand how APR works, then using these opportunities, you will not allow your credit card debts to drag you to the bottom. Always consider options for reducing APR and take action.
You can also apply for a personal loan with a lower interest rate on our website, if you already have a big debt on your credit cards.