What is a Credit Card Interest Rate? How does it Work?05/20/2019
The interest rate on a credit card is one of the more important elements to pay attention to when you are opening a credit card. Since it will affect any balance you will carry on your credit card, the interest rate is something you want to get rid of or lessen it as much as possible. You also want to make sure you are choosing a credit card with the lowest interest rate. Here are some good things to know about credit card interest rates so you can avoid high interest rate credit cards.
How Credit Card Interest Rates Work
Finding the cheapest interest rate is pretty important when choosing a credit card. Expressed in an annual percentage rate, or APR, the rate of interest on a credit card will be listed in the credit card disclosure. Even though the APR is advertised in terms of a year, the interest charges will accrue monthly on your statements. The interest rate will vary depending on the type of card you have as well as things like your credit score.
Every time you carry a balance, this interest rate will be applied to the balance and will show on your billing statement. On average, you will have a grace period when you can avoid paying the interest by paying your balance in full. Just remember that any balance that is left after the grace period ends with have an interest charge applied to it. And, if you don’t have the cheapest interest rate, then you will end up paying a lot of money over time.
How to Evaluate APRs
Variable vs. Fixed Interest Rates
These are the most common types of credit card interest rates. With a fixed rate of interest, it will only change under specific circumstances and you must be sent advanced notice by the credit card issuer before your rate is changed. In comparison, variable interest rates are subject to a different interest rate, like the prime rate, and can be changed whenever the index rate changes. You don’t have to be notified in advance of any changes, and you will find interest rate on credit cards are variable.
You may also notice that you have different APRs for a range of balances. When you apply for a credit card, check and see what the APR is for balance transfers, cash advances, and purchases. There is also often a penalty APR that can be charged if you make a late payment and default on your credit card terms. Just remember that when paying on a credit card that maintains different balances and APRs, whatever you pay over the minimum payment amount will go to the balance that has the highest APR.
What is the Normal Credit Card?
Depending on the credit card you have, the average interest rate will vary. You will find higher rates on reward credit cards to make up for those added benefits that you get. Otherwise, the rate will depend on your credit score. The average interest rate will vary between 13 and 15%.
How to Find Out Interest Rate on Credit Card
When you first sign up for a credit card, the APR should be listed on your statement. If you are interested in figuring out your periodic interest rate, you basically divide the APR by 12. You will often see periodic rates based on billing cycles that are less than a month. When that happens, the periodic rate will be calculated as the APR divided by 365 multiplied by the days that are in that billing cycle. When you calculate interest rat for each day, you can divide the APR by 365.
Only at specific times can your credit card issuer raise your interest. This is usually when your promotional rate expires, you default on the terms of your credit card terms, changes were made to a debt management plan, or the index rate increases.
Other Things to Know About Credit Card Interest Rates
Opting Out of a Rate Increase
When you receive the notice that your interest rate is going to increase, remember that you can opt-out of the new interest rate and continue to pay on your credit card at the old rate. It is possible that your credit card issuer will cancel your credit card as a result, but at least you won’t have to pay the high interest rate. All you need to do to opt-out is to send a simple letter to your credit card issuer during the opt-out period to get the decrease interest rate.
Avoid Paying Interest
In most cases, you can avoid paying interest on your credit card balances by just paying the balance in full. Certain balances like balance transfers and cash advances don’t come with a grace period, so it is harder to avoid paying the interest. Another way to decrease interest rate charges is to pay the balance off as fast as you can.
Credit Card Interest Rate Tips
- Separate charges and interest rates are charged for balance transfers and cash advances, so try to avoid these transactions if possible. Using credit cards can be easier than taking out a small personal loan, just make sure you use it wisely.
- If you make late payments, the credit card company can charge you’re a high-interest rate, so make sure you make your payments on time.
- When choosing a credit card, do your research and find the cards with the lowest interest rate. Your average consumer is not that diligent which is like throwing away money.
- The Prime Rate is what most credit card companies use when you calculate interest rat that is variable. You will find interest rate that is set up by the Federal Reserve Bank and is three percentage points above the federal funds rate. Since this interest rate can increase, you need to be careful not to end up with more interest charges each month than you can comfortably afford to pay.