Picking a credit card: Why knowing what APR means matters

You have decided you’re interested in applying for a credit card. How do you choose?

Dan Pierson, an accountant at Northland Credit Union, said one thing students should pay close attention to is the interest rates of a card. These yearly rates are known as the annual percentage rate (APR).

The APR of a card varies from company to company. APR is also determined by a customer’s creditworthiness and the Prime Rate. Creditworthiness is the creditor’s measure of an individual’s ability to pay off their debt obligations, according to investorwords.com. The Prime Rate is the rate banks charge their most creditworthy customers.

For example, say you are interested in signing up for a card with an APR of 13.24 percent, which translates to about 1.10 percent per month. If you have a balance of $1,000 on this card, you will be charged $10 in interest for that month.

However, if a minimum payment is missed or a customer goes over the credit limit, the APR jumps significantly, often above 27 percent. If your card’s APR jumps to 29.99 percent (about 2.50 percent a month) because you missed a payment, a $1,000 charge will incur $25 in interest.

This is why paying attention to interest rates is better than minimum payment rates, Pierson said. It is also important to know how much you can spend, he said.
“[Choosing a credit card] depends on what you can afford,” Pierson said. “You need to understand your interest rates and how much you’re paying.”

Contact Morgan Feddes at morgan.feddes@whitworthian.com.

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