by Kailey Hagen | Updated July 27, 2021 - First published on Sept. 17, 2019
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Here's one lesson millennials could learn from their elders.
Credit card debt is a problem. While fewer millennials carry credit card debt than previous generations and the average millennial's credit card debt is lower than the average baby boomer's, boomers do appear to have one thing going for them that millennials do not.
The Ascent conducted a study on credit card usage by generation and found that while millennials were more likely to be drawn to a credit card based on its rewards, baby boomers were 39% more likely to focus on a card's APR. More disturbing, that same study found that baby boomers were more than twice as likely as millennials to understand what APR even means.
This suggests that many millennials lack an understanding of basic finance essentials, which could cause them to take on even more debt in the future.
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APR stands for annual percentage rate, and the baby boomers are right to focus on it when choosing a credit card, especially if there's a possibility that they could end up with credit card debt.
It's essentially an annualized version of your interest rate and it indicates the cost of borrowing the money. The higher the interest rate is, the faster any balance you carry will grow and the more difficult it will be to pay off. You can convert your APR into the daily interest rate to understand how much your balance will grow each day by dividing the APR by 365.
For example, a card with a 20% APR would have a daily interest rate of 0.05479%. To figure out how much you'd pay in interest per month, you'd multiply your daily interest rate by your average daily balance for the month and then multiply this by the number of days in your billing cycle. So if you have a $1,000 balance on a card with a 0.05479% daily interest rate, you'd multiply 0.05479% by 1,000 to get about $0.55. If there are 30 days in your billing cycle, you'd multiply this by 30 and you'd get $16.50 per month in interest.
Your credit card's APR doesn't kick in right away. The card gives you a grace period of at least 21 days in which to pay off the money you've charged to your card during that month. If you pay it all off within that time frame, you won't owe any interest. But once you're outside of that window, your balance grows daily according to your APR.
Your card issuer determines your APR based on your creditworthiness when you apply. It's considered riskier to lend money to someone with fair or poor credit than to someone with good or excellent credit, so individuals with worse credit can expect to be charged higher APRs. That will account for the increased risk in lending to them.
Credit card APRs can range from under 15% for those with good credit to over 30% for those with the worst credit. You can figure out your credit card's APR by checking your cardholder agreement.
The APRs we've been discussing thus far are purchase APRs -- that is, the rate you're charged for new purchases you make with your card if you carry a balance. But some card issuers charge different APRs for different things. For example, many cards charge a higher APR for cash advances or balance transfers, so these balances may grow even faster than your purchases.
Some cards also have penalty APRs, which kick in if you make a late payment or exceed your credit limit. This essentially increases your purchase APR for a set period of time, and some card issuers leave this penalty APR on your card indefinitely. If you've incurred a penalty APR on one card, that could also trigger a penalty APR on all of your other cards with that issuer, even if you've been a responsible payer on those other cards.
Then, there are introductory APRs, which are lower, temporary APRs meant to entice new customers. Often, the card issuer gives you a 0% intro APR for a certain number of months, and switching to one of these cards can help you pay down your credit card balance more quickly because you don't have to worry about your balance accruing interest during that time.
If you have credit card debt that you're trying to pay down, using a balance transfer credit card with a 0% introductory APR could be a smart decision. This is especially true if you feel confident that you can pay off the full balance before the introductory period is up. If not, then you also have to weigh the card's standard APR as well as any balance transfer fees associated with the card to decide whether transferring your balance is worth it.
Another option is to negotiate a lower interest rate on your existing cards. This works best if you've had the card for several years and you have a good payment history. Contact the card issuer by phone and lay out your case, highlighting your loyalty and explaining why you believe you deserve a lower interest rate. Don't be afraid to mention that there are plenty of other card issuers you could take your business to. If you're firm but polite, your card issuer may be willing to give you a lower credit card interest rate, which will slow the growth of your balance.
Understanding how your credit card's APR works isn't enough on its own to get you out of debt, but it can help you avoid making poor decisions that cost you even more money. If you don't already know your credit card's APR, find out today and try some of the above tips if you're currently carrying a balance.
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