The fee you pay for the privilege of borrowing money from a lender or creditor is known as the interest rate. It is expressed as an annual percentage and can be calculated in numerous ways. Not only can the interest rate itself be determined through several methods, but the way it is applied to your monthly credit card bill can vary as well. Here's the basics of interest rates and interest charges:
Variable vs. fixed interest rate
These
days, most credit cards include variable APRs; meaning the interest rate will change
or "vary" as the PRIME RATE (or other indexes) vary. The credit card
company adds a "margin" to the index to come up with the variable APR. When the
index goes up, so does the credit card rate. Likewise, if the index goes down,
your credit card APR does as well.
Fixed rate
credit cards, on the other hand, are supposed to stay "fixed". But this
isn't necessarily true. The credit card company reserves the right to change your
rate at any time. As long as you are given at least 15 days notice, your "fixed"
rate could be changed at any time.
To gain the most benefit,
choose a variable rate credit card when interest rates are decreasing. As the
PRIME RATE falls, so will your APR. But if interest rates are rising, you can
try to reduce the impact with a fixed rate card instead. Although your credit card
company will probably raise a fixed rate as well, it won't happen immediately
and you'll receive notification in advance.
A
credit card may have several APRs
Pay
close attention to credit card "Terms and Conditions". If you carry
a balance from month to month, even a small difference in the APR can have a huge impact on how much you pay over time. Make sure you know how you'll be
charged and what you'll be charged for. Here are some things to pay attention to:
Varied APRs: The APRs for cash
advances and balance transfers often are higher than the APR for purchases (for
example, 14% for purchases, 18% for cash advances, and 19% for balance transfers). |
Tiered APRs: Different rates may be
applied to different levels of an outstanding credit card balance (for example, 16% on balances
of $1–$500 and 17% on balances above $500). |
Penalty APRs: Your APR could increase if make a payment late.
For example, your card agreement may say, “If payment arrives more than ten
days late two times within a six-month period, the penalty rate will apply.” |
Introductory APRs: Intro rates are a great way to save on new purchases or balance transfers. These 'teaser' rates are often used to attract new cardholders. 0% intro APR credit cards are among the most popular on our site. But be aware, different
rates apply after the introductory rate expires. |
| Delayed
APRs: A different rate may apply in the future. For example, a card may advertise
that there is “no interest until next March.” Look for the APR that will be in
effect after March. |
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