Personal Finance / Unit 5: Credit and Debt
5.3 Credit Cards and APR
Notes
A credit card lets you borrow up to a credit limit. If you do not pay in full, you pay interest.
- APR (annual percentage rate) is the yearly cost of borrowing. The monthly rate is $\displaystyle \frac{\text{APR}}{12}$.
- Example: 24% APR is 2% per month. On a $500 balance, one month of interest is $500 \times 0.02 = 10$, so $10.
- Paying the full statement balance by the due date usually means you pay no interest on purchases.
- Late payments can bring fees, a higher rate and credit score damage.
- A card is a loan, not extra money.
Practice
What does APR stand for?
APR is the yearly cost of borrowing.
A card has an 18% APR (so 1.5% per month). How much interest is added in a month to a $1,200 balance if nothing is paid?
$1200 \times 0.015 = 18$.
How can you avoid paying interest on credit card purchases?
Paying in full avoids interest on purchases.
Ready for more? Take the Unit 5 test.