What is a Weighted Average?
A weighted average takes into consideration how much each card's finance charges represents of the whole -- giving more weight to the interest rates of cards with higher balances.
Suppose you have two cards. The first card has a balance of $5,000 with an annual percentage rate of 18%. The second card has a balance of $1,000 with an annual rate of 12%.
If you use the common method of calculating the average APR (known as the "mean" average), you would add the two rates together and divide by two, giving you an average APR of 15% (18% + 12% = 30% ÷ 2 = 15%).
However, if you calculate the actual finance charge for the two cards, you will see that the numbers don't add up.
If we divide 15% by 12 to get the monthly rate of .0125 (.15 ÷ 12) and multiply the balance by that result, the total finance charge for the two cards would be $75. Obviously, that is not correct.
In order to get the actual average rate, we need to work backwards. First we take the $85 and divide that by the total balance to get a monthly rate of .0142 ($85 ÷ $6,000 = .0142 rounded). Multiplying .0142 by 100 and then by 12 gives us the actual average annual rate of 17% (.0142 * 100 = 1.42 * 12 = 17% rounded).
The reason the actual average is higher than 15% is that the card with the higher balance has more influence (weight) on the average than the card with the lower balance. Hence the term "Weighted Average."
Why is Knowing Average APR Important?
Now that you understand what "weighted average" means, you should now have a clear idea of how to prioritize your efforts to get your interest rates lowered.
Since it's the weighted average that determines how much interest you will pay on all of your cards, you will want to focus all of your efforts on lowering the rates of your highest rate, highest balance cards, because they carry the most weight.