The Annual Percentage Rate (APR) is the relative cost of credit as determined in accordance with Regulation Z of the Board of Governors of the Federal Reserve System for implementing the federal Truth-in-Lending Act, according to Charles O. Stapleton III, Thomas Moran and Martha R. Williams, authors of "Real Estate Principles," (3rd Ed., Dearborn Financial Publishing, Chicago). The APR is the actual yearly interest rate paid by the borrower, figuring in the points charged to initiate the loan and other costs. The APR discloses the real cost of borrowing by adding on the points and by factoring in the assumption that the points will be paid off incrementally over the term of the loan. The APR is usually about 0.5% or greater than the note rate.

What is the effective interest rate?

This is also referred to as the effective annual rate (EAR). The effective rate is the relevant rate since it represents what you are actually paying or receiving. For example an 8% stated rate paid annually on a $1,000 investment is $80 per year. However, if the interest is paid quarterly, the annual effective interest is (1.02)^4 - 1 or 8.24% which results in $82.40 per year. The formula is read, "1.02 raised to the 4th power minus 1." The 1.02 is 1 plus the annual rate (8%) divided by the number of compounding periods in the year (4). Generally, stated rates are advertised in large print and effective rates are disclosed in the fine print. Read the fine print because the effective rate is what you actually pay or receive. See also real interest rate and nominal interest rate.

What is the nominal, or stated, interest rate?

The nominal interest rate is the stated interest rate. It should be distinguished between the real rate and the effective rate. The nominal rate is the real interest rate plus the inflation rate. The nominal rate must be adjusted to reflect compounding periods, interest add-on, and compensating to determine the effective rate. Read the fine print to find out what you are actually paying or receiving. It most likely is not the nominal (stated) rate. See also real interest rate and effective interest rate.

What is the real interest rate?

The real rate of interest is the rate adjusted for inflation. For example, if the stated interest rate is six percent and inflation is three percent, the real rate of interest is approximately the stated rate less the inflation rate or, in this example, three percent (6% - 3% inflation = 3% real rate). See also nominal interest rate and effective interest rate.

What is actually in a credit report?

According to "The New Century Family Money Book" (Dell Publishing), "For each credit account, the report lists the creditor, type of account, terms, amount of the original debt or credit limit, and balance outstanding on the most recent report. A payment profile for the previous 12 months is made that indicates whether the individual fell behind on payments at any time during the previous year. "A credit report is not necessarily a complete credit history. For example, some card issuers do not supply credit bureaus with any information on cardholders’ accounts, claiming that this would be a violation of the customers’ right to privacy. Many gas credit cards report only delinquent accounts. Mortgage lenders seldom supply information to bureaus, because creditors assume that those obligations will be met even if you are behind on others." Most credit grantors are primarily interested in the latest 12- or 24-month reporting period. Many credit bureaus routinely delete older information from their files. However, a bankruptcy can stay on a credit record for up to 10 years and debts that a creditor writes-off as "uncollectable" can remain for seven years.

What exactly is bad credit?

There are numerous types of credit report problems that would cause a lender to reject your application for a loan. Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years or not paying your taxes. Other black marks on a credit report include a judgment filed against you (perhaps for non-payment of spousal or child support) or any collection activity. If you feel that your credit report is wrong, experts say it’s best to take it up with the organization or company claiming you owe them money. But if you’ve been late paying your bills, regroup by paying in full and on time for six months to a year to prove to the lender that the late payments were an aberration.

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