Key terms to understand: APR = Annual Percentage Rate. APY = Annual Percentage Yield. Other terms that get thrown in include "daily compounding rate", etc. Let's take each of these in turn.
APR: This is a %. For example, a 24% APR means that the annual interest rate is 24%. Without any other complexity (which there is, but let's ignore this for now), this means if your card balance was $100 on Jan 1, then at the end of the year the balance will be $100 + 24% * 100 = $124.
The problem is that credit cards do not compound the interest annually or even monthly; they often do this DAILY (often shown in the fine print of your card). Thus, a 24% APR will actually be 24%/365 = 0.06575342% per day - often called the "daily compounding rate".
Since interest compounds daily at the rate shown, it means that the balance at the end of 365 days of compounding is:
100 * (1.0006575342)365 = 127.114
This means that we have really paid 27.11 in interest - this is the effective interest rate also called APY.
Notice how the 24% APR actually became 27.11% in terms of APY - this is because of the daily compounding.
So don't get fooled by the APR - if you carry a balance (which you should not), you are, in fact, paying a higher interest rate than that already high number!!!!!
So next time you receive a credit card offer, you should be able to read through its terms and understand what all the interest numbers mean!
Finally, understanding the interest rates does NOT mean you should pay them!!! Try to avoid paying interest at these exorbitant rates as much as possible!!!!
Submitted November 07, 2017 at 09:02AM by arnexa http://ift.tt/2zog5qG
