How Are Annual Percentage Rates Calculated?


Quick Answer

The annual percentage rate is determined by combining the U.S. Prime Rate, which is published by the Wall Street Journal, with the margin that the bank or financial institution charges, reports the Bank of America website. The annual percentage rate helps determine the cost of borrowing or opening a credit card, states Bankrate.

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Full Answer

The U.S. Prime Rate is derived from the federal funds rate, notes Bankrate. The federal funds rate is the primary driver of interest rates in the economy. The Federal Open Market Committee determines the federal funds rate, and the Wall Street Journal then conducts a banking survey to determine the U.S. Prime Rate. Banks utilize this U.S. Prime Rate with considerations of their own premiums to determine an annual percentage rate, states the Bank of America. The annual percentage rate is then modified to determine daily periodic rate and total interest for a particular period.

For borrowers, a lower credit score can yield a higher annual percentage rate, according to Bankrate. The annual percentage rate only refers to interest and does not include any fees, such as balance transfer fees. Borrowers with multiple credit cards from a financial institution do not always have the same annual percentage rate for each card. Certain promotional rates can differ from the standard annual percentage rates.

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