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APR for your credit card is calculated on a daily basis and quoted annually. Each credit institution sets its own terms and agreements for credit accounts.
Function
APR stands for annual percentage rate. However, interest is charged to your account monthly. It is calculated using a daily periodic rate.
Time Frame
The monthly finance charge is determined by summing your average daily balances for each day in a billing cycle divided by the number of days in a billing cycle.
Considerations
Some credit accounts have annual fees as well as minimum finance charges. Also, some credit accounts have a grace period, in which no finance charges occur. These fees and grace periods are set by the creditor.
History
The APR was first required to be stated to the borrower in 1968 by the Truth in Lending Act.
Misconceptions
For a an installment loan, in which each payment is equal, your APR may not be the same as your actual (effective) interest rate. Effective rate = (2 x annual No. of payments x interest) / (total No. of payments + 1) x principal
Source:
Foundations of Financial Managment. Block, Stanley B., and Hirt, Geoffrey A. 2008.
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