Every credit card holder is familiar with the topic of interest rates, APR (Annual Percentage Rate), or in general, rates. Rates are intertwined with every bank transaction, may it be a debit card, bank card, and, most significantly, credit card.

One of the critical elements of being a responsible credit card user is understanding the differences between interest rates that services and transactions offer to the Annual Percentage Rate that is requested annually.

Interest Rates

We are familiar with interest, the compound percentage of an item whenever we shop using credit cards. Interest rates determine the cost of the compound percentage of an item, depending on how long you loan that item, plus the principal cost.

It is what keeps banks, stores, shops, and anything that involves credit cards in business. Lenders will let you borrow your wants and needs for a specific time and period and present a staggered payment scheme that will make that item affordable. In return, lenders charge the principal amount and the applied interest rate for that item.

Some companies even promote zero interest rates on transactions to encourage the use of credit cards. We might be confused as to how or why that happens, but it is simple. Most of the time, there is a marketing strategy wherein companies introduce a limited period where that interest is zero.

If the item was not paid or were still in credit by the promo ends, the interest rate would be applied accordingly.

Factors affecting Interest Rate.

Many factors contribute to changing interest. It varies with the time, inflation rate, amount of money being lent, the purpose of the transaction, and importantly, to whom it is being lent to. Banks and companies are not lenient on interest rates and will also depend on your stature in life and lifestyle.

For example, a working student wants to get a new iPhone X on credit. That particular Apple merchant will assess that credit card as to how the working student can pay the item's principal cost and compound interest. 

Can the student pay for it? How long? Is this profitable?

These are factors that affect interest rates. Whenever using your credit card, always ask about the affordable payment scheme with regards to the interest rate. Thus, never go off budget or worse, overspend in credit.

What is APR?

Annual Percentage Rate is the yearly rate or charge for borrowing money from your credit card. To fully understand this, we will go back to the interest rate. An interest rate can be charged monthly, quarterly, bi-annually, and annually. If it is charged annually, it is called an APR.

It is easily understood whenever you sign documents that foresee a long-term loan. It is not as simple as a one-step transaction where you are billed at the end of the month.

Knowing your current APR also helps you understand the effects of your transaction on your credit card. It keeps a list of transactions that includes interest, loan, fees, and due balances. Many factors can affect APR, and it always depends on the bank.

Factors Affecting APR.

APRs are in constant change and are sometimes variable. The prime rate index determines how Variable APRs change and fluctuate, meaning as PRI changes, the Variable APRs changes too.

As the Variable APRs are tied to the prime rate index, the prime rate index is also connected with the Federal funds rate determined by the Federal Reserve. Meaning, if the Federal government deems to adjust interest rates all over the country, then all variable APRs will fluctuate consequently.

Accordingly, lenders will always notify the APR change as no market or supply and demand is constant.

How the two differ.

With all these details in mind, the difference between Interest Rate and APR is its application in the loan or the borrowed object. Interest Rate is the compound percentage in an item's market price, more specifically in a short-term loan. An APR is a more comprehensive Interest Rate in which it constantly changes from lower to higher depending on the market, annually.

Keep in mind...

The interest rate always varies depending on the company or financial agency. Remind yourself that interest and APR will always coexist with having a credit card. This is how banks and companies can supply themselves financially.

Think of it as a give-and-take situation. What you take, or instead buy with your credit card, will be deducted to you as a give. It is not always something that would put you back from using credit cards. In the end, being financially literate will always help you on how to keep up with these things, therefore, keep being vigilant on what you use your credit for, and before any transactions, check the interest rate and APRs.