What is APR and how are finance charges calculated?
APR is an acronym for annual percentage rate. This is the annual interest rate that the credit card issuer charges on outstanding balances. For example, a $100 balance on a credit card with a 20% APR would result in $20 of finance charges over the course of a year. Because credit card balances constantly change, the credit card issuer divides APR into a daily period rate or monthly periodic rate. The daily and monthly periodic rates represent the daily and monthly fraction of the annual percentage rate respectively. The finance charges in a given month are calculated by multiplying the balance by the periodic interest rate. Since the balance during the billing cycle fluctuates due to purchases, cash advances, and payments, the bank computes an average balance. Most banks use either the one-month average daily balance method or the two-month average daily balance method.
