Throughout this blog, there will be posts that define important terms to know when understanding credit cards. These posts and definitions will be summarized on my glossary page.
In theory, the Annual Percentage Rate (APR) is the interest rate charged annually on the outstanding balance of a credit card. For instance, if a particular credit card had an APR of 15%, and there was a $100 outstanding balance on that account for a year, the interest charged would be $15. However, when applied in actuality, it’s not so simply.
See, nearly all credit cards charge interest DAILY based on the DAILY outstanding balance using a Daily Periodic Rate (DPR). This is found by taking the card’s APR and dividing it by 365 days per year, generally round to the nearest 1/100,000th of 1%. So, going back to our example of 15% APR, the DPR would be 15% ÷ 365 = 0.041009589, rounded to the nearest 1/100,000th is 0.04101 interest charged on the daily balance. This may not sound like much, but with the effect of compounding interest added DAILY, it grows to be a big number quickly.
What’s compounding interest? Stay tuned for a future post that defines and illustrates the astonishing effect of compounding interest.
So, at the end of the day, the APR is actually just used to find and calculate the DPR, and actual interest charged on a credit card balance can end up being way more than the stated APR. Buyer (a.k.a. credit card holder) beware!
A graphic found on Bank of America’s website that simplifies how the APR relates to the DPR.
Hurricane Sandy struck on Monday, October 29. By 1:03a, Tuesday, October 30, I received an email from Wells Fargo stating late fees would be waived on credit cards, consumer and certain small business loans, including home-equity, auto and student loans. What a nice gesture towards those hit by Sandy.
The email also advised me that “Fees normally charged to you for using another bank’s ATMs when you use another bank’s ATM in Maryland, Virginia, Washington, D.C., Delaware, Pennsylvania, New York, New Jersey and Connecticut” will be waived.
Wow, Wells Fargo! Really earning some consumer brownie points. These two acts of financial compassion during a disaster will ultimately affect their income, but this was the least they could do to “help during these difficult times.”
But then, 24 hours later, I receive an email from Bank of America.
I’m fed up with the countless credit card offers I receive…daily. I am spending one year documenting all the offers I receive to demonstrate the severity of the problem and how it relates to the larger American credit card debt crisis.
My goals are to highlight the fine print in these offers and ideally educate others regarding the danger of credit cards and the financial havoc they can wreak.