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Every time you charge something with plastic and, at the end of the month, don't pay it back in full, you're borrowing money from your credit card company. And since they're not just good Samaritans looking to help a schmo in need, they're gonna charge you for it.

How much? Well, credit card companies don't have your assets squared away as a guarantee that you'll pay, so they can charge you pretty high interest rates.


Whenever you see a credit card ad, you'll notice that three little letters keep coming up: APR.

APR refers to Annualized Percentage Rate, and, in theory, it's the interest rate you'll pay on the card. Just to make things fun, though, it's not the rate you're actually going to be paying. See, the APR is tallied up once a year (that's where the annualized part comes in), but when credit card companies actually charge you, they're tallying the interest rate monthly. They call that the the effective APR, and the difference can be expensive when it's time to pay your bill:

Nominal APREffective APR
Annualized rate18.0%19.6%
Divided by 12 months1212
Monthly rate1.50%1.63%
Monthly payment$15.00$16.30
Interest you pay in a year$180.00$195.62

Just how much ouch it entails will depend on your interest rate and how much money you're spending. If you owe your credit card company a few hundred bucks and the difference is between $15.00 and $16.30, it might not seem that bad. But if you owe $10,000 or $50,000 that's a pretty steep increase from what you thought you were paying.

Your interest rates (both what you're quoted as an APR and the Effective APR) will depend on a bunch of stuff. If you're a good credit risk and the credit card company wants your business, you may get better rates (both nominal and effective). If you've skipped a few credit card payments here and there and went over your limit trying to squeeze in that one extra dinner on your card? Not so much.

APR is one of many reasons you'll want to read all the fine print on your credit card agreement—even if you need to spring for a magnifying glass to get it done.

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