How does Annual Percentage Rate work with credit cards?

Credit card companies profit by charging fees and interest to their account holders. The most popular format for these finance fees is the Annual Percentage Rate, or APR. APR dictates how much more of a credit card balance you accrue everyday that you carry a balance on your account.

When dealing with credit card debt, it's important to understand how much your APR impacts your balance. You can figure that out by converting the APR to a daily interest rate; do so by dividing the APR by 365 days. If your APR is 19 percent, for example, the daily rate is 19 divided by 365, or 0.0521 percent. On a balance of $1,000, you would accrue 52 cents.

It may not sound like much, but the APR is applied to a growing balance each day, and individuals with large credit balances can quickly see finance charges get out of hand. For example, consider an account with a balance of $10,000 at the same rate. The first day, the account is charged $5.21. By the end of the month, the account balance has increased by $157. With minimal or no payment, the account balance can increase by over $2,000 a year, even if you don't charge another item all year!

Understanding how credit card debt works is the first step to getting out of a debt situation. Understanding your legal options for debt relief is the next step. If you are facing serious credit card debt, then filing for bankruptcy or seeking legal assistance with creditor harassment are two possible next steps. Speaking with someone who understands financial matters and the legal process can help you identify the best steps for you.

Source: CardHub, "How Does Credit Card Interest Work?," Odysseas Papadimitriou, accessed July 24, 2015

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