Effective Annual Percentage Rate

Factual Questions
1

This is a credit card question. Is it possible for the “Effective Annual Percentage Rate (APR)” on my balance to be higher than any of the component APRs?

My monthly statement says,

My finance charges on the monthly statement break down as:

X dollars at 9.99% APR
Y dollars at 4.99% APR
Z dollars at 5.99% APR

Yet the Effective Annual Percentage Rate at the bottom is 10.02%, higher than any of the component APRs. How is this possible?

I have no hidden or irregular finance charges on this statement — no cash advance fees, no balance trasnfer fees, no late fees, etc. I called the credit card company, and they said they think the APR is correct.

2

I suspect that the three component APR’s don’t include service fees (cash advances, balance transfer fees, and the like) while the EAPR does.

3

Compounding, I think. I’m too lazy at the moment to get my finance textbook out, but as I remember, the APR is simply the compounding rate per period multiplied by the number of compounding periods in a year.

For example, 9.99% APR, compounded monthly, means that there is 9.99%/12 interest charge per month. Compound this across a year (remember, you pay interest on interest), starting with a hundred dollars, and you have $110.46 in debt, not $109.99 (subtle difference, but it adds up), for an effective APR of 10.46%.

My guess is you have a lot of X and not very much Y or Z, such that, after weighting, the average comes out to 10.02%.

4

I just noticed you addressed my theory in you OP, sorry. Go with MrJackboots instead.

5

This is true.

6

What MrJackboots said.

Just as a deposit account will quote an Annual Percentage Rate (APR) and an Annual Percentage Yield (APY), you credit account is quoting an APR and an EAPR.