What Made My Jaw Drop Last Week
Last week, as I browsed online, I saw an advertisement for a British Airways American Express credit card that made my jaw drop and head explode. 🤯
Let’s be clear, I am NOT against the use of credit cards, quite the contrary! When used wisely, credit cards can be a great strategy to build credit and receive some awesome benefits and travel perks. However, I am blatantly against predatory practices and rates that can hurt consumers and trap them in unmanageable debt.
👀 Check out the advertisement below…
Yes, the card in question advertises a WHOPPING representative APR of 139.9% variable, a £300 annual fee, and an assumed £1,200 credit limit with a 31% per annum variable purchase rate.
This is an astonishingly high cost for a credit card, and it highlights the importance of understanding the true cost of borrowing.
It’s also why I wanted to share a couple of #nuggetsofwisdom with you today!
Let’s talk about APR!
Representative APR (Annual Percentage Rate) is a measure used in consumer finance to indicate the annual cost of borrowing.
It includes BOTH the interest rate and any additional fees or charges associated with the credit product. The purpose of representative APR is to provide a clear, standardized way for consumers to compare different credit products.
🔑 Key Features of APR:
- Inclusion of Fees: It includes not just the interest rate but also fees like annual charges, making it a more comprehensive measure of the borrowing cost.
- Representation: The rate shown must be offered to at least 51% of applicants who are accepted for the credit product.
- Comparison Tool: It allows you to compare the cost of different credit products more easily.
Representative APR vs. Purchase Rate
While the representative APR gives an overall picture of the cost of borrowing, the purchase rate is the interest rate applied specifically to purchases made with the credit card.
💳 For instance, the British Airways American Express card has a 31% per annum variable purchase rate.
31% Per Annum Variable Purchase Rate:
✓ This rate applies to the purchases you make with the card. ✓ It can fluctuate based on market conditions, hence the term “variable.”
✓ It does not include additional fees or charges.
The most important rate to be aware of…
Representative APR:
➡ Combines the interest rate with all additional fees to provide a comprehensive annual cost.
➡Offers a more realistic picture of what you might pay over a year when carrying debt over.
Why This Matters
Understanding the difference between these rates is crucial for making informed financial decisions.
Here’s why:
1️⃣ Transparency: Representative APR includes all costs, providing a clearer understanding of the total borrowing cost.
2️⃣ Comparison: It allows you to compare credit products effectively, ensuring you choose the one that best suits your financial needs.
3️⃣ Financial Planning: Knowing the true cost helps you budget and manage your finances better.
So, friends don’t forget when evaluating credit cards to look beyond the purchase rate (consider the representative APR), understand that your individual APR may vary depending on your credit score, and be aware of additional fees!
Let me know if you have any questions and remember to Wear Your Money Crown with pride!
XOXO,
Anna
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Anna Orenstein-Cardona is a Financial Coach and NFEC-Certified Financial Educator (CFEI) who empowers organizations, small-business owners, and individuals to grow their money knowledge in fun and creative ways. She worked on Wall Street and in the City of London for over two-decades, before launching her financial education and coaching business, Wear Your Money Crown®.
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