Most of us use at least one credit card. But when you are unfamiliar with the terms and technicalities of credit instruments, handling your expenses can get tricky.

The last thing anyone wants is to get trapped in a vicious cycle of debt. To avoid this, you need to know answers to questions like 'What is a secured credit card,' & 'What is the APR on a credit card,' etc. Understanding how it works, its advantages and disadvantages, and the different ways to reduce the APR can help you maximise your credit limit.

What Is an APR on a Credit Card?

One of the most common terms associated with the credit card is the Annual Percentage Rate, or APR. By definition, APR is the yearly interest charged for a sum of money to the borrower, including additional fees and costs along with the transaction. This provides a bottom-line number to the consumer to compare lenders and credit cards to take an informed decision. However, compounding is unaccounted for here.

Calculating Credit Card Interest Using APR

The interest charges are levied on your monthly statement when using a credit card. You are charged an additional amount if you fail to pay within the interest-free term. Many banks calculate this interest using the Daily Periodic Rate (DPR), as certain months have more days than others. DPR is the APR divided by 365 or 360.

So, what is the APR on a credit card you use? You need to know the Average Daily Balance or ADB to calculate your credit card interests. The monthly interest would be DBR multiplied by the billing cycle and ADB.

What Is a Secured Credit Card APR?

Unlike other credit cards, you pay the deposit upfront if your card is a secured credit card. Your credit history and credit score determine your eligibility. But a security deposit is required for the line of credit if you use a secured credit card.

Now, what is the APR on a credit card if it is a secured credit card? Although the answer varies across different lenders, the rate is usually high. So, why is a secured credit card's APR high? Typically, secured credit cards incur a higher APR and lower credit limit due to bad credit history. Naturally, the risk associated with these cards is the primary reason for the high APR.

Conclusion

Despite its significance, APR is not the most accurate reflection of the cost of borrowing. Sometimes, it even understates the actual cost of a loan. If you do not have a good credit history, the only option is a secured credit card with a high APR. But it is always advisable to consider all factors of a credit card and understand the risks before getting one.

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Frequently Asked Questions

1. How can I reduce APR?

The best practices to reduce the APR on your credit card are as follows:

• Always pay your credit card bills on time.
• Keep the expenses low and within 1/3rd of your credit limit.
• Diversify the credit mix to improve the credit score further by keeping the overall credit utilisation low.

Maintaining a good credit score is crucial to getting the best APR rates, whether your card is secured or not.

2. How much APR is too much?

A higher APR means you have to pay higher interest on any money you borrow on the credit card and do not repay it in time. On average, anything over 24% APR is considered too high for any loan you take.