How do I calculate apr rates on credit cards? Well … It depends on what your intention is. You might want to try using one of the calculators on the web, or even this one on creditcardswise.com. However, I would recommend reading this article to the end, getting to know simple principles behind the credit card APR, and how to use those principles to easily calculate real interest rate, annual percentage rate, your monthly payment, and most important, the total cost of borrowing for your credit card account.

Your Effective APR

The first important thing to know about a credit card APR is that the advertised APR you see on a card’s pre-approved offer is always lower than the actual percentage rate you have to pay. And here is why.

All credit card issuers always give us APR (annual percentage rate) information, and it is usually calculated without taking into account what is called compound interest. That means the actual interest paid will be larger than the bank is proposing.

If banks would be completely honest with customers, they should be talking about APY  (annual percentage yield), not APR. That is what we actually pay to the bank when we use credit card money. We pay compound interest, which brings extra cost to us and extra profit to the banks.

Grace Period

This is the amount of time you have after your first purchase to pay your balance off without paying any interest on the credit amount. The banks usually offer a grace period of 20 to 30 days, but shorter ones are becoming more and more common these days. Some banks are generous enough to give a grace period on all new purchases, but others will include your new purchases into the balance immediately.

Your credit card grace period and effective APR are both very important points to look at when you are evaluating a credit card offer, or if you decide to look at where you stand with your current credit card.

Another important thing you should not overlook is how the banks calculate your balance and how to verify what your effective APR actually is.

Read on …