Essential Information When Choosing a Credit Card
October 23, 2012
When comparing credit cards it is important to know a few basic things. None of these require that you be a financial expert or math wizard, but are instead simple things that will help you make the smartest choice when making a decision as to what credit card to apply for.
There are two essential things you need to know so you can make a smart decision when choosing a credit card. First, what APR actual is and second how to calculate the actual interest fee you will be paying.
First APR, or annual percentage rate, is the interest rate spread across the year as opposed to something like a monthly interest rate. You should be aware there are two types of APR. Nominal APR is what credit card companies are required to reveal and often advertise. It represents the simple interest rate. The effective APR, a rate often not advertised, takes into consideration the compound interest rate. It is a more accurate representation of what you will be paying on your credit card as it takes into consideration the compounded interest.
Credit cards use compounded interest. That is when interest is added to the amount owed, so therefore the interest fee charged also collects interest.
To figure out the effective APR (EAR) on a card you have to do a little math.
EAR = (1 + APR/n)n- 1
“n” represents how often the rate is compounded. So if the compound rate is compounded monthly, n=12. If it is quarterly n=4.
For example if you are getting a card that is compounded monthly with an APR of 19.9% the equation would read:
EAR = (1 + .199/12)12– 1
If you are not good with math then simply plug the equation into a smart calculator available as a free app on most smart phones (“Real Calculator” is an example of this).
It is also important to check and see what other sort of fees you could be subject to, like late fees, service fees, etc.
Armed with this information you can now wisely choose a credit card.
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