Want to understand APR, but all the banking terms confuse you? Don't worry! Here's everything explained in plain English with no fancy words.
1. What is APR? The Simple Answer (With $10,000 Example)
APR is just the total cost of borrowing money for one year. Here's what that means:
- It shows how much extra money you'll pay for a loan
- It includes your interest rate plus any fees
- Lower APR = You pay less money
- Higher APR = You pay more money
Using $10,000 as an example:
- 10% APR means you pay about $1,000 extra per year
- 20% APR means you pay about $2,000 extra per year
- 5% APR means you pay about $500 extra per year
2. Credit Cards and APR: Two Ways to Use Your Card ($10,000 Example)
The Smart Way (No Extra Charges):
If you charge $10,000 on your card:
- Pay the full $10,000 when bill comes
- You pay $0 in extra charges
- Total cost = exactly $10,000
The Expensive Way (Extra Charges):
Same $10,000 on your card:
- Only pay $300 minimum payment
- Keep $9,700 balance on card
- With 15% APR, you'll pay about $121 EXTRA in just the first month
- If you keep doing this, you'll pay about $1,500 extra in one year
3. Your Credit Score Matters ($10,000 Example)
Think of APR like grades:
Using a $10,000 loan for one year:
- Excellent Credit (700+): 8% APR = $800 extra per year
- Good Credit (650-699): 12% APR = $1,200 extra per year
- Fair Credit (600-649): 15% APR = $1,500 extra per year
- Poor Credit (below 600): 20% APR = $2,000 extra per year
Good to know:
- Average credit card APR is 15%
- Less than 15% = Good deal
- More than 15% = Not so good deal
4. How Banks Figure Out What You Pay ($10,000 Example)
For Credit Cards:
If you have $10,000 balance with 15% APR:
- Daily rate = 0.041% (15% ÷ 365 days)
- Daily cost = about $4.10
- Monthly extra cost = about $123
- Yearly extra cost = about $1,500
5. Save Money on APR: Simple Tips ($10,000 Example)
Credit Card Tips:
You charge $10,000:
Best Option:
• Pay full $10,000 when due
• Pay $0 extra
• Total cost = $10,000
If You Can't Pay It All:
• Pay only $300/month
• With 15% APR
• Take 4 years to pay off
• Total cost = about $13,000
• You pay $3,000 extra!
6. Common Questions
"Can I Choose My APR?"
No. Banks look at:
- Your credit score
- Your income
- Your other debts
- Then they set your APR
"Does APR Hurt My Credit Score?"
- No - your credit score affects your APR
- But your APR doesn't affect your credit
- Late payments DO hurt your credit
Easy Ways to Get Better APRs
1. Make Your Credit Better:
- Pay bills on time, every time
- Keep credit card balances low
- Don't apply for lots of new cards
2. Be a Smart Shopper:
- Check different banks
- Ask lots of questions
- Don't rush to decide
- Read everything carefully
3. Watch Out For:
- Very high APRs (over 15%)
- Rates that can change
- Hidden fees
- Deals that sound too good
