New tool translates APR into interest charges- and gives you advice on how to reduce costs
We all know credit card charges and APR are a bit difficult to work out on your fingers and toes. Some people think that APR is a useless measure and instead people should be told how much they are paying back instead. Payday loan companies often say this, which is completely unrelated to the fact that their APR charges come in in the thousands rather than the (normally) high teens for a credit card.But you could be misled into thinking that an APR under 20% is not that bad- but if you only make the minimum payment on your credit card, you could still be up for a fairly hefty interest charge, for a long, long time.
Now the UK Cards Association has come up with a new tool which means you can see exactly what your APR means for you in terms of interest payable and how long it will take you to pay off your card balance.
The tool was conceived out of a research project undertaken with the Personal Finance Research Centre (PFRC) at The University of Bristol, which concluded that consumers are struggling with the ‘APR’ as the traditional measure of illustrating the cost of borrowing.
As well as providing links to consumer debt advice and budgeting tools, the online calculator will not only calculate the interest charges and repayment schedule of current cards and balances, but will also be able to answer questions such as:
If I want to pay off this balance in a year, what do I have to pay each month?
If I carry on paying as I've been doing, how long will it take me to pay this off?
Can I really afford to make that purchase on my credit card?
If I repay more each month, how much will this save me in interest charges?
Andrea Finney, Senior Research Fellow at the Personal Finance Research Centre, commented:
“This new website was developed to give users the opportunity to see the cost of their cards as a direct reflection of their actual balance and how they use their card.
The way that credit card costs are calculated and applied can be complicated enough, but when you add in the potential different combinations of types of balance and the many different approaches consumers can take to repay their cards, the picture becomes even more complex. It’s extremely difficult for consumers to navigate this complexity on their own.”
On the first page, consumers need to select their outstanding balance, the APR on their card and quantify their current repayments, whether they only pay the minimum, and how must they spend on the card each month.
Given the average UK credit card balance is around £1,000 a card with an APR of 18.9% that was paid off only at the minimum payment amount of 1% plus interest charges (around £25 a month) would take 18 and a half years to pay off, and you would pay more than the £1,000 balance in interest charges during that time. By just fixing the payment amount at £25 instead of allowing it to fall as the balance drops, you would save £756 in interest and almost 13 and a half years.
Seems like a pretty useful tool to us.