APR and the true cost of credit

Interest rates are not comparable until you convert them to the same measure. That measure is APR.

What APR includes

APR bundles the interest rate with compulsory fees and expresses the cost as an annual figure. A loan at 6% with a 500 arrangement fee may have a higher APR than one at 7% with no fee. Comparing headline rates alone is how people choose the more expensive product.

Watch for representative APR: lenders only have to offer it to 51% of accepted applicants. Your actual rate can be higher once your credit file is assessed.

The minimum payment trap

Card minimum payments are typically set at a small percentage of the balance. Paying only the minimum on a card at a typical rate can take well over a decade and cost more in interest than the original purchases. Paying a fixed amount each month instead - even a modest one - shortens it dramatically, because the balance falls rather than hovering.

0% offers: useful, with rules

A 0% period on purchases or a balance transfer is genuinely valuable if you follow three rules:

1. Divide the balance by the number of 0% months and pay that fixed amount, so it clears before the offer ends. 2. Factor in the balance-transfer fee, usually a percentage of the amount moved. 3. Never miss a payment - one slip can void the promotional rate entirely.

Buy now, pay later

Individually small, collectively dangerous. BNPL splits payments across weeks and is easy to stack across several retailers until the combined monthly commitment is invisible but large. Missed payments can now affect credit files in many countries.

The mental shortcut

Convert any interest rate into cash: a 2,000 balance at 24% costs roughly 480 a year to carry. That framing makes clearing it feel urgent in a way percentages never do.