The Truth about Credit Card APRs A lower APR isn't exactly a good deal By Mo2

What does APR stand for?
One question. Do you choose your credit card by the interest rate it comes with? Are you one of those people that get suckered in because it has a 0.9% APR (Annual Percentage Rate) for the first year? I hope not.

To tell you the truth I don't even know what the APR for my credit card is. "Why?" you ask, because I never carry a balance on my credit card unless in the most serious of situations.

The negative effect of compound interest
When you carry a balance on a credit card you're accumulating one of the worst types of debt. Say you spent $2,000 on the things that you just had to have in the past month. You pay $1,000 and have a remaining balance of $1,000. However, because you're carrying a balance on your card, on most if not all cards, you get charged interest on the entire $2,000. Weird eh? But that's the reality of it. Not only that, it's compounding interest so the longer you carry your balance, the more it will hurt you.

Always pay your balance in full every month!
This should be your number one rule of all things. You can really hurt yourself financially if you aren't on top of your credit card usage. It might seem tough but you really shouldn't be putting purchases on your credit card that you can't afford right away. If you are making purchases that you can't pay for with cash then you're not being money smart at all and should reconsider the purchase.

What you See Isn't What you Get
If you think about it, if you have to pay compounding interest on your purchases once you can't pay off the balance in full, your balance grows much faster than the APR you're originally given. This is because you have the beautiful art of compounding work against you! Really, take this seriously you need to pay off your balance before the monthly deadline, every time! Therefore you need to understand that the APR isn't the effective interest rate which is the actually rate you're charged after taking compounding into consideration. (Read the Compounding Interest Article for a better idea of compound interest).

Cash Advance
Cash advances are crazy, I've never done one myself because I think it's probably one of the dumbest things you can do unless you're cornered and have to (i.e. You're on vacation and lost all your cash but magically had your credit card). From the instant you go to an ATM machine and withdraw that $500 you need to pay for the dinner you're about to take your new girlfriend out to, you pay daily compounding interest on that amount. So you're actually paying more for that dinner than you probably originally considered. I'm sure she's worth it, but imagine what else you could buy for her if you were money smart!

Conclusion
Credit Card companies often use lower APRs to attract credit card users. But in reality, you shouldn't even be paying attention to the APR, always have a firm grasp on your monthly budget and never go beyond that unless in emergencies where you have no choice. Pay off your balance all the time so that you won't have to pay insane amounts of interest for carrying a $10 balance. Always make sure you can afford credit card purchases with cash before you make them. Use your credit card as a tool to accumulate points or to improve your credit card, not to reward yourself every second day with a new pair of Nike sneakers.

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