On those scary terms and conditions pages that most of us don't bother to read, the industry standard is to report your finance charges in terms of APR, or Annual Percentage Rate.
Across the internet, this number is meant to represent an apples-to-apples comparison across cards, but it doesn't really work that way.
The APR only gives you a vague understanding of how much you're really paying for credit.
Especially when cards have extras like promo APRs, ongoing APRs, and balance transfer APRs, it becomes a bit more difficult to compare based on one of those numbers alone.
In order to determine what your actual interest rate is, you have to first find out how your interest is being compounded.
For all credit cards that we know of, this is monthly along with your billing cycle, so your APR is simply this monthly rate multiplied by 12.
If your reported APR is 11.
99%, your monthly interest rate is 11.
99% / 12 = 0.
999%.
Now since you're being charged this much every month, it adds up over the year to be a bit more than just 11.
99%.
Imagine you are paying interest on a hundred dollars.
After the first month you'll owe $100 x 1.
00999 = $101, after two months you'll owe $100 x 1.
00999 x 1.
00999 = $102, but then after a full year you'll owe $100 x (1.
00999)^12 = $112.
67.
This is quite a bit more than what your APR seems to imply, which is $100 x 1.
1199 = $111.
99.
That $12.
67 is your real cost of credit, so your Effective Average Rate (EAR) is 12.
67%.
What does this mean when you have, for example, a teaser APR of 1.
99% for 6 months, going up to 23.
99% after that? Is that any better than a card that offers a flat 10.
99%? Well that's when the calculation gets tricky, and comparisons across cards with different attributes becomes much harder.
It helps to have a few nerds on your side to crunch the numbers, which is why we have an EAR calculator, which takes into account all promotions and fees to give you a real apples-to-apples comparison.
Based on our calculations, here are some of the cards with the lowest EARs: For excellent credit: * IberiaBank Visa Classic * Platinum from BB&T For average credit: * Platinum Select from Citibank * Visa Platinum Card from Wells Fargo So you can see that EAR is a powerful tool.
With it, you can combine all those different interest rates into one easy-to-digest number and then compare your credit card choices accordingly.
So next time you see a credit card offering an ultra-low APR for the first few months, whip out your calculator and make sure it's not too good to be true!