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Thursday, November 13, 2008

What is APR? And what is considered low for a credit card?

By Ben Harper

APR has so much to answer for. If all you know about APR's is that they are a number that comes with credit cards and you look at to see if one is better than another this this is the article for you. In this article APR will be revealed in all of its financial splendour. APR will be reconstructed like a surrealist text. APR will be shown for what it truly is. But seriously if you're thinking of applying for a new card, perhaps even a low APR credit card, or if you have a card and have never really thought about it, you really should know what an APR is and does.

APR stands for Annual Percentage Rate and is the overall rate of the card. This figure includes the interest rates themselves as well as any one off fees that you may be expected to pay and so on. It is different to the monthly interest rate because this figure doesn't include the fee etc. In the days before APRs companies could make their card seem better than it actually was by not disclosing all of the extra costs. Basically a card could look like a low APR credit card even if it wasn't.

Before displaying the APR became a legal requirement it was possible for credit card companies to confuse consumers through clever mathematical manipulation. They could make a bad card seem better than it actually was. Also it was possible for them to leave out annual fees making the card look even better. Then APRs were made mandatory to protect customers and to make the market transparent and more honest.

Nowadays all of the tricks above are gone because of the use of APR. The APR shows any fees and interest that will be charge in a very clear format, one that has been standardised, and that everyone, at least on the surface, understands. However the APR doesn't mean that this is the actual amount that you need to pay in a year. For example, if you spend a £1000 over a year you do not pay back £1100 on 10% APR card. If you pay the money off quicker you will pay less than the ten percent in the example above. If you pay it off slower you end up paying more. What's more the APR changes depending on how you use the card. For example the APR on card purchases is different to the APR on cash withdrawals.

This brings us to what exactly is considered a low APR credit card. You have to remember that the credit card industry is extremely fast moving and new cards are introduced all the time. However a typical APR is around 16% or 17%. Of course this goes up and down as the years go by. A card with an APR lower than 10% is good and one approaching 5% is very good. The lowest APR card on the market at the moment, for example, is 6.8% although there are cards with rates of around 8% also available.

So that's it, not as mysterious as it at first seems really. However there are two other things to remember. Firstly you should be aware that low APR credit cards, should you fancy one, are notoriously difficult to be accepted for. You need to have a very good credit rating in order to be accepted. It would be a good idea to approach one of the credit referencing agencies and pay for your credit report. You may find that you need to do a bit of work to get your credit rating up. Secondly just because a card has a high APR doesn't mean it should be discounted entirely, there may be other things about the card that makes it worthwhile.

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