1. What is Effective APR?

Effective Annual Percentage Rate (APR) represents the true annual cost of borrowing, accounting for compounding interest. It provides a more accurate measure of credit card costs than the nominal APR, especially when interest compounds more frequently than annually.

2. How Does the Calculator Work?

The calculator uses the effective APR formula:

Where:

• \( \text{nominal} \) — Nominal annual percentage rate (%)
• \( \text{periods} \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding, showing how more frequent compounding increases the actual interest cost.

3. Importance of Effective APR Calculation

Details: Understanding effective APR helps consumers compare different credit card offers accurately and make informed financial decisions about borrowing costs.

4. Using the Calculator

Tips: Enter the nominal APR percentage and the number of compounding periods per year (typically 12 for monthly compounding). All values must be valid (APR ≥ 0, periods ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between nominal and effective APR?
A: Nominal APR is the stated annual rate, while effective APR includes the effect of compounding, showing the true annual cost.

Q2: How often do credit cards typically compound interest?
A: Most credit cards compound interest daily, which means 365 compounding periods per year.

Q3: Why is effective APR higher than nominal APR?
A: Effective APR is higher due to compounding - you pay interest on previously accrued interest.

Q4: Is effective APR the same as annual percentage yield (APY)?
A: Yes, effective APR is essentially the same concept as APY, both representing the actual annual rate including compounding.

Q5: How can I use this information when comparing credit cards?
A: Compare effective APRs rather than nominal rates to understand the true cost difference between cards with different compounding frequencies.