APR & AER

[Deleted User]

Hi everyone,

I’m new to the forum and wanted to know a few things:

1. Is it worth it to know how to calculate the APR and AER by yourself or just use an online calculator to do the work for you?

2.What’s the best credit card for a beginner like me? Expenses will be mainly shopping around and train travel.

[Deleted User]

1. It's always sensible to have least a rough idea of how the APR works.

2. Whichever one you can get. Your own bank or a sub prime provider will give you the greatest chances. Try an eligibility checker first.

dresdendave

Ideally you should be planning to pay your card in full every month. This means you won't pay any interest regardless of the APR. 

That said, it wouldn't do any harm to have a basic knowledge of APR and how cards work.

Gerry1

You could do worse than Barclaycard Rewards, if you can get one.

0.25% cashback on all purchases, no charges when you're abroad, and unusually you can also get cash from foreign ATMs without any fees or interest providing that you repay in full by the due date.  A free card doesn't get much better than that.

Sandtree

dresdendave said:

Ideally you should be planning to pay your card in full every month. This means you won't pay any interest regardless of the APR. 

That said, it wouldn't do any harm to have a basic knowledge of APR and how cards work.

Which includes the fact that APR is the total cost of borrowing £1,200 over 12 months and so includes both interest and fees... hence some of the prestige credit cards list APRs of over 100%. Paying the balance in full each month only negates the interest aspect of APR.

[Deleted User]

Thanks, so to calculate the APR it’s the total amount borrowed plus the percentage?
E.g £2000 loan over 12 months with 11.5% APR =11,5%*£2000=£230+£2000=£2230?

OldMoneySaver

Deleted_User said:

Thanks, so to calculate the APR it’s the total amount borrowed plus the percentage?
E.g £2000 loan over 12 months with 11.5% APR =11,5%*£2000=£230+£2000=£2230?

You have the terminology a bit mixed up - the APR is the percentage (11.5% in this example), as it stands for Annual Percentage Rate.

Cost of borrowing = APR * amount borrowed = 11.5% * £2,000 = £230.

Total repayable = amount borrowed + cost of borrowing = £2,000 + £230 = £2,230.

Nebulous2

Deleted_User said:

Thanks, so to calculate the APR it’s the total amount borrowed plus the percentage?
E.g £2000 loan over 12 months with 11.5% APR =11,5%*£2000=£230+£2000=£2230?

That gives you the total repayable if your balance stays at £2000 and you only pay the interest each month, then pay off the £2000 at the end. (interest you have calculated is on £2k throughout) If you pay the loan off by making equal instalments each month you will pay interest on £2k in the first month, then your payment will cover all the interest and pay off some of the loan (A) The second month you will pay interest on £2000-A which will be less so more of your payment will go to repaying the loan. 

Very roughly the interest over the year works out at half your £230 or £115 (as your average debt over the year will be half the £2000.) So you will repay £2115. 

Ebe_Scrooge

Deleted_User said:

Hi everyone,

I’m new to the forum and wanted to know a few things:

1. Is it worth it to know how to calculate the APR and AER by yourself or just use an online calculator to do the work for you?

2.What’s the best credit card for a beginner like me? Expenses will be mainly shopping around and train travel.

To add to the previous very useful replies about how to calculate interest ..... please be aware of the difference between a loan and a credit card.

At its simplest, if you take out a loan, you borrow a sum of money, at a fixed APR, to be repaid over a fixed time period.  The monthly payments will be calculated for you, to ensure that, at the end of the term, you will have repaid the principle (the amount you borrowed) plus interest.

Credit cards work in a similar way - every time you buy something using a card, you're effectively borrowing money to pay for it.  The key difference is that there is no fixed time by which you must pay back what you've borrowed.

However, a couple of really important things to consider with credit cards.  Firstly, the APR on a card will typically be much more than for a loan.  Secondly, carrying a debt from one month to the next on a card is not ideal for your credit history (as well as being an expensive way of borrowing).  Perhaps most importantly of all, this isn't the "correct" way to use a card.  You really really should be using the card simply for making everyday, planned purchases, and ALWAYS repaying the balance in full every month.  Doing this will cost you nothing in interest, and is a simple way of building up a favourable credit history.

So yes, the way interest is calculated is the same whether it's a loan, mortgage or credit card.  And yes, it's a good idea to have an understanding of how interest is calculated.  But for a credit card, the APR should be of no concern, since - used properly - you'll never pay any interest.

Sandtree

Ebe_Scrooge said:
 But for a credit card, the APR should be of no concern, since - used properly - you'll never pay any interest.

It should be because APR is total cost of borrowing of £1,200 for 12 months for a credit card... an AmEx BA Premier card has an APR of 101% whilst paying off the card in full each month does mean you dont pay interest you cannot simply ignore the APR because it includes the £250 annual fee that is still payable in full irrespective if you clear the balance each month or not.

Ebe_Scrooge

Sandtree said:

Ebe_Scrooge said:
 But for a credit card, the APR should be of no concern, since - used properly - you'll never pay any interest.

It should be because APR is total cost of borrowing of £1,200 for 12 months for a credit card... an AmEx BA Premier card has an APR of 101% whilst paying off the card in full each month does mean you dont pay interest you cannot simply ignore the APR because it includes the £250 annual fee that is still payable in full irrespective if you clear the balance each month or not.

OK, fair point :-)  I should perhaps have said "for most standard credit cards that don't charge an annual fee".  But point taken.