Do you find your credit card statement a confusing word salad? With so many government regulations required on the statements, the only part of it that’s easy to understand is the “payment due”!
It’s easy to just make the minimum payment month after month, but if you are going to carry a balance on a credit card, there’s a lot of information on the statement that you need to understand. One of those pieces of information is Annual Percentage Rate (APR).
APR is the total cost of borrowing money, expressed as a percentage of the total owed, applied per year.
- Let’s say you charged $1,000 for merchandise and your APR is 24%. In a year, you’d owe $1,240. That’s the $1,000 you owe plus $240 in interest and fees (24% of $1,000).
- Most commonly, APR is “compounded” – or applied – monthly. This can make the math a bit trickier. That means you’re charged 2% each month. If you owe $1,000 at the end of your monthly statement period, you’d be charged $20 in interest. Your total due would be $1,020. If you made no payment, you’d be charged interest on the new balance, which is now $1,020. Interest and fees for the second month would be $20.40.
That extra $.40 might not seem like much, but it adds up over time. A lower APR means your monthly payments and total costs will be lower. In many cases, it also means getting out of debt sooner. Let’s look at steps you can take to lower the APR on your debt.
If you wanted to buy a new blender, you’d do research, find out which one is the best, then compare prices to make sure you are getting the best price. Most people are willing to invest that much time and energy into a relatively minor household purchase. Unfortunately, financial tools don’t get the same treatment.
Think of the APR like the price tag.
- If you want to put the costs in real terms, take the amount you currently owe and multiply it by the listed APR. That’s the cost of the loan. You owe it to yourself to do the homework and find the best deal for your money.
- Federal law requires lenders to disclose their APR prior to any agreement. You can take that information with you and compare it to the rates offered by other lenders. Compare the rate you’re getting to competitors and make sure you get the best price!
If you have several high-APR loans, it might be time to investigate consolidation options. Consolidation can take several forms.
- Debt restructuring loans bundle all your debt into one monthly payment with an affordable APR.
- You might be able to use the equity in your home to pay off your debt. Home loans tend to have the lowest APR because they are secured by the value of your house.
- Take advantage of low introductory APRs on new accounts to pay your balance quickly and avoid the powerful compounding interest.
Be mindful when you consolidate your high-interest debt to avoid conditions or other terms that might hurt you. Many sketchy firms offering consolidation loans have emerged, offering terms that sound too good to be true.
The bottom line is to make sure you understand exactly what it will cost you to carry a balance on your credit card. Be sure to look not just at your minimum payment due but the APR that you are being charged on that card.
Whether you’re struggling under the weight of high-interest loans or are just getting started in your financial life, sometimes talking to a credit education service or looking to a consolidation loan can help keep you get on track and stay in good economic shape.
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