What’s the Difference Between an APR and an Interest Rate?

An APR is all-inclusive of all finance charges and other associated costs not included in a loosely defined “interest rate”. An interest rate on the other hand is a loosely defined term for what can be considered the percentage (%) of interest you payback on a given borrowed principal amount. For this reason, an APR is a more accurate cost of borrowing! The APR is the true cost of borrowing, while the interest rate is a sort of benchmark on the current “market rate” you are getting. For example, a given interest rate on a borrowing product might be 21% but the APR is 22.19%. So, the APR is effective 1.19% higher than what the advertised interest rate is.

Another difference is that credit Card APRs are compounded daily. This means that you are paying interest on your outstanding balance every single day you maintain a balance. This is also why credit card debt is one of the most difficult debts to pay down. Besides just high APRs/interest rates, compounding daily interest mean that you will have to pay substantially higher than the minimum payment to make a dent on your balance. The difference might seem negligible at first but if you account for the difference over the years, it really ads up. This is especially true on a line of credit with a longer repayment period, like a mortgage loan.

What is Considered a Good APR?

Good APRs are relative and will highly depend on your credit worthiness. Although, credit card interest rates are hardly ever “good”, since they are the riskiest type of credit you can acquire, anything better than 9-12% is typically a solid interest rate. In this environment those are very good interest rates as Mortgages are still near 7%. However, we now appear to be entering a period of quantitative easing and a falling rate environment. The FED is expecting to yet again lower interest rates to offset any future losses in economic productivity.

What About Credit Cards?

Credit cards are only meant to be used as a short-term vehicle for borrowing. In the long term you do not want to pay 20%+ APRs for using credit cards, this will be detrimental to your finances in the long term. For this reason, it is advised to make use of other credit opportunities whenever possible. Unless credit cards are being used a short-term vehicle for borrowing and you are avoiding interest payments on them altogether, this is ill-advised.

Can You Get a Lower Interest Rate?

It might sound too easy but your best bet is to call your credit card companies and simply ask for a lower rate. Discuss how long you’ve been a customer, any financial hardship you’ve been undergoing, and why you think you should get a better APR. More often than not, they might lower your rate simply because you asked them nicely.

How Can You Avoid Paying Interest Altogether?

The easiest way to never pay interest on credit card debt is to pay down your “statement balance” at the end of each month. As long as your “statement balance” is zero, you will not pay interest on pending charges and are free to use your credit card without paying interest. This means that you should have approximately 21 days of no interest, in between each billing cycle. If you fall out of your “grace period”, you need to have a $0 balance for two consecutive billing cycles for it to start over again. This way you can effectively lose no money to interest and keep ahead of your finances.