Stupid question about APR on Credit cards for beginners

[LaboonTheWhale]

Hey LTT community.

 

I have a stupid question that young adults should know but I'm confusing myself. I just want to ask this and make sure for the sake of my sanity.

 

I understand that APR is the interest rate on the card for a balanced that is not paid for a billing cycle.

 

So applying for a credit card, it says 0% intro APR for first 15 billing cycles. does that mean hypothetically I buy a $1,000 kitchen appliance. I only pay $500 off. That $500 then is transferred over to the next period and is a $500 balance I have to pay off + whatever balance I have for that billing cycle. Correct?

 

Then lets say it goes up to 20% APR. It'll be $500 + 20% of that $500 + Balance of that billing cycle?

[Razor Blade]

APR or Annual Percentage Rate is calculated on a balance that is carried over to the next month. If you have a 20% APR it isn't 20% per month, it is 20% over a year. This means your monthly calculated interest rate will be 20% divided by 12 months. Minimum payment can vary from issuer to issuer but will generally take into account principle and interest rate.

 

In your example if you carried over a $500 balance you would be charged 8.33 after the first month. Your new balance would be 508.33 for the next month. You wouldn't have interest for your introductory 0% APR but make sure you read the agreement carefully and understand it (don't be afraid to call them and ask questions) to make sure you don't get caught up in a got-cha.

[airdeano]

yes, if that is the terms/conditions of the contract.

 

your $1000 debt now has the conditions of many interpretations.

each month you will be required to make a monthly payment to pay off the debt. what happens if you miss one payment? two payments?

 

you've been making the minimum payment ($33.33 for 15 months/cycles) and have a remaining balance of $500 (no missed payments, congratulations!).

the APR is set to your 20%. your next statement will reflect your remaining debt, plus the 20% or $600 balance to be spread amongst the next calendar year.

so instead of the $33.33, your new minimum monthly payment will be $50. your balance will increase $ 8.33 per month to reflect the new interest. pay it off early, save that $ 8.33 times months ahead of the year.

[LaboonTheWhale]

34 minutes ago, Razor Blade said:

APR or Annual Percentage Rate is calculated on a balance that is carried over to the next month. If you have a 20% APR it isn't 20% per month, it is 20% over a year. This means your monthly calculated interest rate will be 20% divided by 12 months. Minimum payment can vary from issuer to issuer but will generally take into account principle and interest rate.

 

In your example if you carried over a $500 balance you would be charged 8.33 after the first month. Your new balance would be 508.33 for the next month. You wouldn't have interest for your introductory 0% APR but make sure you read the agreement carefully and understand it (don't be afraid to call them and ask questions) to make sure you don't get caught up in a got-cha.

Derp. Its ANNUAL percentage rate. not monthly. I definitely made a mistake understanding that. Thanks for clarifying.

 

35 minutes ago, airdeano said:

yes, if that is the terms/conditions of the contract.

 

your $1000 debt now has the conditions of many interpretations.

each month you will be required to make a monthly payment to pay off the debt. what happens if you miss one payment? two payments?

 

you've been making the minimum payment ($33.33 for 15 months/cycles) and have a remaining balance of $500 (no missed payments, congratulations!).

the APR is set to your 20%. your next statement will reflect your remaining debt, plus the 20% or $600 balance to be spread amongst the next calendar year.

so instead of the $33.33, your new minimum monthly payment will be $50. your balance will increase $ 8.33 per month to reflect the new interest. pay it off early, save that $ 8.33 times months ahead of the year.

Oh I've been paying it off in full monthly. But now that im going to be moving out on my own and everything and some bigger purchases may need to happen (furnishing an apartment/home) There may be times I would have to pay it off over time.

[Pixel5]

also note that many of these special offers with 0% are aimed at you raking up debt thinking you can pay it off and then they have a clause to retroactively charge the interest for everything not paid of after the 0% are over.

[wasab]

For dummy:

Pay everything in full and only buy things on credit if you have enough cash in checking account to cover them. 

 

This is what I do since the first day I got my first credit card. If I see I can't afford something with my checking account then I will see I can't afford it using my credit card account either. 

 

[TVwazhere]

13 hours ago, wasab said:

For dummy:

Pay everything in full and only buy things on credit if you have enough cash in checking account to cover them. 

 

This is what I do since the first day I got my first credit card. If I see I can't afford something with my checking account then I will see I can't afford it using my credit card account either. 

I generally stick to this rule and I have a FICO credit score of around 750. 

[LaboonTheWhale]

On 7/2/2018 at 10:33 AM, TVwazhere said:

I generally stick to this rule and I have a FICO credit score of around 750. 

I'm sitting at 744 paying everything off. I just want to make sure I understand this in case I buy a home and those kinds of large purchases may occur.

[Razor Blade]

On 7/1/2018 at 8:56 PM, wasab said:

For dummy:

Pay everything in full and only buy things on credit if you have enough cash in checking account to cover them. 

 

This is what I do since the first day I got my first credit card. If I see I can't afford something with my checking account then I will see I can't afford it using my credit card account either. 

 

It takes an immense amount of self control to do that... Many people just aren't able to do it. When things happen there are those that just use the card to fix the problem instead of getting creative or trying to find a different way. A balance is so easy to carry and the payment proportion is seemingly low. People that carry a balance may or may not know that they're getting screwed on interest but maybe they just don't want to think about it. 

 

Obviously there aren't enough people that have the self control to pay off their balance every month. That is why credit card companies have gigantic buildings and very well paid CEOs.

[TVwazhere]

10 hours ago, Razor Blade said:

It takes an immense amount of self control to do that... Many people just aren't able to do it.

I wouldnt call it immense control. Just be an adult about it. Yes, buying the $4000 computer I want to build is very tempting, getting a new 4K TV for my neew room would be great, buying a new turbo for my car would be awesome, and all of this is possible with a credit card... but I understand the value of money and the money that I have. I simply do not have that money to actually spend, so I simply tell myself I cannot afford it.

 

Try setting credit limits that are similar to your monthly income. That way you CANT charge more than you actually have and it makes you prioritize. If there's something you absolutely NEED (like a water heater breaks or there's an actual emergency) I would suggest looking at loans from a bank or credit union instead, they might have lower rates than putting it on your credit card.

[Razor Blade]

5 hours ago, TVwazhere said:

I wouldnt call it immense control. Just be an adult about it. Yes, buying the $4000 computer I want to build is very tempting, getting a new 4K TV for my neew room would be great, buying a new turbo for my car would be awesome, and all of this is possible with a credit card... but I understand the value of money and the money that I have. I simply do not have that money to actually spend, so I simply tell myself I cannot afford it.

 

Try setting credit limits that are similar to your monthly income. That way you CANT charge more than you actually have and it makes you prioritize. If there's something you absolutely NEED (like a water heater breaks or there's an actual emergency) I would suggest looking at loans from a bank or credit union instead, they might have lower rates than putting it on your credit card.

From everything I keep reading about, people like that are in the minority. Sure there are people that fall into hard times and turn to credit to scrape by, however there are those that do that and those that just don't think about it. When I was younger I certainly didn't budget my income. I quickly spent more than I made. It was so easy to do because credit was there and I wasn't proactive about what it would mean to my future. I learned from my mistakes of the past. Some people never do. They want a new car they can't afford, they want the new computer they didn't save up for, they want the new kitchen in the new house they just bought on debt. The list goes on and on. Maybe it is a matter of discontentment...maybe it is just laziness...either way when I say it takes immense self control what I mean is when people finally take control of their financial life, it takes that self control to stay on track and not lose focus.