It goes like this:
• Interest is what you pay to borrow money.
• What you pay is based on the amount you borrow.
• You borrow $1,000.
• The interest rate the bank’s going to charge is 10%.
• You pay $100 a year to use that $1,000.
This interest rate is called the Annualized Percentage Rate (APR). It’s splashed everywhere on credit card ads: 0% APR…low APR…12.99% APR! It’s the rate that people use to compare credit cards. But it understates the rate you’ll actually wind up paying. That real rate—the effective APR—is always a little higher because credit card companies calculate interest monthly and the APR is based on calculating interest annually, or just once a year.
|Nominal APR||Effective APR|
|Divided by 12 months||12||12|
|Interest you pay in a year||$180.00||$195.62|
There are dozens of different rates and reasons why those rates are higher or lower for a given person. For more interest info, go here.