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Credit
Card Interest Rates
So you have just received an envelope that contains a shiny piece of plastic emblazoned with your name. Amazing … a bank or financial institution just gave you a credit line that you can use as you wish! Before you begin blissfully swiping it on just about every cash register around, take the time to read this article to be familiar with credit card interest rates.
A credit card is an authorization to spend the money of the company that issued it, in return for a pledge that you will reimburse them in the future, called a
payment due date. |
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This date is printed on your card’s monthly billing statement along with the absolute price of the things you purchased for that month (the outstanding balance). Intelligent credit card users pay for the total outstanding balance on the payment due date every month. On the other hand, there may be instances that you will not be able to pay the entire balance. Throughout these times, the credit card company will allow you to borrow the money longer, until the next month’s payment due date, for a fee of course. This fee is calculated based on the credit card’s interest rate.
Usually, credit card companies quote the APR (Annual Percentage Rate) as the interest rate for using their card. But this is not completely accurate. When you do not pay the entire remaining balance, interest is applied to it, which is called the monthly periodic rate (which equals APR divided by 12). This is added on to the unpaid total and becomes next month’s outstanding balance. Each month, the periodic rate is applied to whatever outstanding balance is unpaid. This procedure is called compounding interest. So, the total of the compounding interest is the Effective Annual Rate (EAR), which is in fact larger than the Annual Percentage Rate. This is the TRUE interest rate of the credit card.
An introductory rate is an interest rate that is offered by a card company for a limited period (for example - the first six months of using the card). This introductory rate is usually very low, sometimes even 0 percent to lure you to submit an application. Following the limited time period, the EAR will be the enduring interest rate. Be sure to check this prior to signing up.
Also, inquire as to whether your rate is variable or fixed. A variable interest rate changes monthly, based on some industry rate (for example, Fed Rate or Prime Rate) from which your rate is calculated (your rate is 5%+ Fed Rate). A Fixed interest rate does not change from month to month. It may be smarter in the long run to choose a fixed-rate card.
Now that you have an enhanced comprehension on obtaining the best credit card rates, it is nonetheless intelligent to resolve the total outstanding balance monthly, in other words, pay it off when you receive each bill. Or even better, pay only for what you can come up with the money for, as if you did not have the credit card in the first place.
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