Considerations

No federal law prescribes how a credit card company must compute its APR, reports Creditor Web. However, companies must reveal the method they use to calculate your particular APR, and many use similar formulas.

Formula

The credit card APR formula is unlike a normal formula because the principal and term of the loan are not set, reports Creditor Web. Thus, you must estimate APR by calculating the interest on the interest over a 12-month span, in addition to any fees. Say you receive a credit card with 10 percent interest. Ten percent on 10 percent each month yields an effective 11 percent APR after a year.

Billing Cycle

Some companies use the balance at the end of the billing period, while others use the balance at the start of a cycle or average the balance you had on each day of the month, reports Creditor Web.

Drawback

Creditor Web reports that as of 2009, credit card companies do not need to include every single fee in an APR calculation, thus artificially deflating some rates.

Warning

No matter how the credit card calculates your APR, late payments will almost always incur a larger, penalty rate, reports the US Federal Reserve.

Source:

CreditorWeb.com; How Credit Card APR Is Calculated

CreditorWeb.com; APR Definition

US Federal Reserve; Choosing a Credit Card